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The Annuity Surrender Charge Period: What It Costs to Get Out Early

Most deferred annuities come with a surrender schedule. For a set number of years, taking out more than the contract allows costs you a charge. That window is the annuity surrender charge period, and it's the one feature people most often wish they had understood before they signed.

The charge itself isn't hidden or sneaky. It's how the insurer recovers its costs when money leaves early. But it does mean an annuity is long money, not emergency money. Below is how the charge works, what an early withdrawal can cost with real arithmetic, the ways around it, and the California rules that apply here.

Quick note on who is talking. opfinances.com is a licensed life insurance and annuity agency in Los Gatos. We are not a financial advisor, not a tax adviser, and not a fiduciary. This is general education about how these contracts usually work, not advice about your money. Your own contract is the final word.

The short version

• The annuity surrender charge period is the stretch of years when withdrawing more than the contract's free amount triggers a charge, usually a percentage that steps down each year.
• Many contracts let you take a set portion out each year without a charge. The amount and the rules are in your contract.
• In California, annuities sold to buyers 60 and older that carry a surrender charge must point to it in bold 12 point type on the cover page or policy jacket (Insurance Code 10127.13).
• A surrender charge is separate from the IRS 10% additional tax on early withdrawals before age 59 and a half. You can owe one, both, or neither.
• Replacing an annuity often starts a brand new surrender schedule, which is why a switch deserves a hard look.

What a surrender charge period actually is.

When you buy a deferred annuity, the contract includes a surrender schedule. It lists a charge for each contract year, usually as a percentage of the amount you take out above the free withdrawal. The percentage typically drops each year until it reaches zero. After that, the surrender charge period is over and you can take money out without that charge.

How long the annuity surrender charge period lasts and how high the charge starts depend entirely on the contract. Shorter schedules are common on some products and longer ones on others, and a longer schedule often comes with different crediting terms. There is no single number that fits every annuity. The only way to know yours is to read the schedule in the contract itself.

Some contracts call it a withdrawal charge.

Insurers don't all use the same word. Some call it a withdrawal charge. California Insurance Code section 10127.10 says whether something counts as a surrender charge is decided by what the charge does, not what the insurer names it, and if a policy calls it a withdrawal charge, the notice has to say so. Some contracts also include a market value adjustment that can raise or lower what you receive when you leave early. Ask whether yours has one.

How the free withdrawal works during the surrender period.

Most deferred annuities don't lock every dollar. Many let you withdraw a set portion each contract year with no surrender charge. Contracts differ on how much, whether it's measured from the premium or the account value, and whether unused amounts carry over. Some start it in the first year and some wait until the second.

This is the part to plan around. If you know you will need some income or a lump sum during the surrender period, the free withdrawal is usually the cheapest way to get it. Taking a little more than the free amount only charges the excess, not the whole withdrawal, on most contracts.

What an early withdrawal can cost, with illustrative numbers.

This example is illustrative only. It is not a real contract, a quote or a promise of any result. Say someone puts $100,000 into a deferred annuity with a seven year surrender schedule of 7, 6, 5, 4, 3, 2 and 1 percent, and a free withdrawal of 10 percent of the premium each year. To keep the math simple, ignore any interest credited.

In year three a roof replacement comes up and they need $30,000. The first $10,000 is free. The other $20,000 is charged at the year three rate of 5 percent, which is $1,000. They walk away with $29,000.

Now say they decide to cash out the whole contract in year three. On this illustrative contract the charge applies to everything above the free amount, so 5 percent of $90,000 is $4,500. Wait until year eight and the surrender charge on the same move is zero. Same money, very different cost, and the only thing that changed was timing.

So when you buy, ask more than what it pays. Ask how much of this money you might need in the next several years. Our answer on the downside of annuities covers the liquidity tradeoff in more detail.

The California rules on surrender charges for buyers 60 and older.

California adds a few protections that a lot of national articles skip. They are worth knowing if you, or a parent, are buying here.

• The cover page notice. Under Insurance Code section 10127.13, individual annuity contracts for senior citizens that have a charge on surrender must include a notice disclosing where to find the charge, the charge period, the charge information and any penalty information. The notice must be in bold 12 point type on the front of the policy jacket or the cover page. The same chapter defines a senior citizen as someone 60 or older on the purchase date.
• A 30 day free look. Insurance Code section 10127.10 gives buyers 60 and older at least 30 days to return the contract. We cover how that works, and the refund rules, in our post on the annuity free look period in California.
• No surrender charges eating the death benefit at 65 and older. Insurance Code section 10168.4 says that for contracts issued on or after January 1, 2016 to people 65 or older, the death benefit must be at least equal to the annuity value or accumulation value, excluding any surrender charges or penalties upon death.

Where to find your own surrender schedule.

Start at the cover page and look for the bold notice. It tells you exactly where the schedule sits in the contract. If you can't find it, call the insurer and ask for the surrender schedule and the free withdrawal provision in writing.

A surrender charge and the IRS early withdrawal tax are two different things.

People mix these up all the time. The surrender charge is a contract term set by the insurer. The 10% additional tax is a federal tax rule. IRS Publication 575 says most distributions from nonqualified annuity contracts made before age 59 and a half are subject to an additional tax of 10%.

The IRS lists exceptions. Among them are distributions made on or after the death of the contract holder, distributions because you are totally and permanently disabled, a series of substantially equal periodic payments for your life or life expectancy, and payments from an immediate annuity that start within a year of purchase. None of those automatically waive a surrender charge, and a surrender charge ending doesn't waive the tax. Check both. A tax professional can tell you how the tax side applies to you, and our page on tax deferred strategies explains the deferral side.

Ways a surrender charge can be reduced or waived.

Beyond the free withdrawal, many contracts waive or reduce surrender charges in specific situations. These vary a lot, so treat this as a list of things to ask about, not a list of things you have.

• Death of the owner or annuitant, and in California the age 65 death benefit rule above.
• Nursing home or long term care confinement, often after a waiting period. Our answer on what happens to an annuity if you need nursing home care walks through it.
• Terminal illness, with a doctor's certification.
• Annuitizing, meaning turning the value into a stream of income payments, which some contracts allow without a surrender charge after a certain year.
• Required minimum distributions on an IRA annuity, which some contracts treat as free withdrawals.

Think twice before replacing an annuity that's still in its surrender period.

Moving money from one annuity to another can mean paying the old contract's surrender charge and starting a new schedule on the new one. Sometimes a switch is still worth it, but the math has to clearly come out ahead. In California the replacing insurer must give you a notice of your right to an unconditional refund of all premiums within 30 days of delivery under Insurance Code section 10509.6, so you get a window to back out. Use it to compare the two schedules side by side.

Questions to ask before you sign.

If you are shopping for an annuity in Santa Clara County or anywhere in California, these are the questions that keep the surrender schedule from surprising you later. A good agent will answer every one in writing. If you want to go through them together, see our annuities page or reach us here.

• How many years is the surrender charge period, and what is the charge in each year?
• What is the free withdrawal amount, when does it start, and does it carry over?
• Is there a market value adjustment?
• Which waivers come built in, and which cost extra?
• If I replace an existing annuity, what surrender charge do I pay on the old one, and does a new schedule start?
• How much of this money could I realistically need before the schedule ends?

FAQ

Questions people ask.

What is the annuity surrender charge period?

The years after purchase when withdrawing more than the contract's free amount triggers a surrender charge. The charge usually steps down each year until it reaches zero. Your contract's surrender schedule lists the exact years and percentages.

Can I take money out of my annuity without a surrender charge?

Often, yes. Many deferred annuities allow a free withdrawal each contract year, and many waive charges for things like death, nursing home confinement or terminal illness. The terms vary by contract.

Is a surrender charge the same as the IRS early withdrawal penalty?

No. The surrender charge is set by the contract. The IRS 10% additional tax applies to most nonqualified annuity distributions before age 59 and a half, with exceptions listed in IRS Publication 575. You can owe one, both or neither.

Where do I find the surrender charge in my annuity contract?

In California, annuities sold to buyers 60 and older that carry a surrender charge must include a bold 12 point notice on the cover page or policy jacket telling you where the charge and its time period are located.

Does a new annuity restart the surrender period?

Usually a new contract comes with its own surrender schedule, so replacing an annuity can mean paying the old charge and starting a new period. Compare both schedules before you switch.

Where this fits.

This post covers one piece of a bigger plan. Annuities walks through the whole decision, and the answer library takes the follow up questions one at a time.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This post is general education, not a recommendation, and reading it does not create a client relationship.

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Sources

• California Insurance Code section 10127.13, surrender charge notice on senior policies and annuities
• California Insurance Code section 10127.10, free look for buyers 60 and older
• California Insurance Code section 10168.4, cash surrender and death benefits
• California Insurance Code section 10509.6, 30 day refund on a replacing contract
• IRS Publication 575, Pension and Annuity Income (tax on early distributions)

Checked November 6, 2026. Rules and limits change; confirm current figures with the source or your own tax or legal professional before acting.