Surrender Charge
A surrender charge is a penalty assessed by the carrier when the consumer withdraws more than the free withdrawal amount from a deferred annuity during the surrender period. The charge is a percentage of the amount withdrawn that exceeds the free amount, and it declines over the surrender period — typically starting at 7-10% in year one and decreasing to 0% at the end of the surrender schedule. The surrender charge exists because the carrier needs time to amortize the upfront commission and acquisition costs through the contract's renewal margin.
A 60-year-old places $200,000 in a 10-year MYGA with a declining surrender schedule: 9%, 8%, 7%, 6%, 5%, 4%, 3%, 2%, 1%, 0%. The contract allows 10% free withdrawal per year. In year three, the consumer needs $50,000. The free withdrawal amount is $20,000 (10% of $200,000). The surrender charge applies to the remaining $30,000 at the year-three surrender rate of 7%, producing a $2,100 charge. The consumer receives $47,900 instead of $50,000.
Why it matters
The surrender charge is the consumer's liquidity constraint on the contract. Annuities are designed to be held to term or to annuitization. Consumers who may need access to principal before the surrender period ends should size the annuity allocation accordingly — never annuitize money the household may need on short notice.
How to evaluate
Match the surrender schedule to the household's liquidity needs. A 10-year surrender schedule on money the consumer may need in 5 years is the wrong product. Check whether the contract has a "rolling surrender" structure (a fresh schedule applies to each new premium) — this is more common on deferred contracts that accept multiple premium payments.
In the contract
Look for "surrender charge schedule," "withdrawal charge schedule," or "contingent deferred sales charge (CDSC)." The schedule lists the percentage charge by contract year.
Related terms
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