Surrender Charges: How They Work and What Free Withdrawals Allow

Most deferred annuities are built to be held for years, and the surrender charge is how the contract enforces that. Take out more than the contract allows during the early years and the insurer keeps a slice of what you withdraw. For many buyers, this is the single cost that matters most, because it decides how much flexibility they really have.

This guide explains how surrender charges and schedules work, what a free-withdrawal provision usually covers, and the other adjustments and taxes that can apply even when a withdrawal is "free." It is general information, not financial, insurance, tax or legal advice. For a specific contract, ask the insurer for written answers, and contact your state insurance department or a licensed professional if something does not add up.

What a surrender charge is

Investor.gov, the SEC's investor education site, describes the surrender charge (as viewed in October 2026) as a charge that may apply if you withdraw some or all of your contract value within a certain number of years of purchasing or contributing money to your annuity. It says surrender charges reduce both the value of and the return on your investment, and that they generally decrease over time.

Note the words "or contributing." On contracts that accept more than one payment, each purchase payment can carry its own schedule. Investor.gov's variable annuity page gives the example of a charge that applies "in the first year after a purchase payment," which means money you add in year three may still be in its first surrender year.

How long surrender periods last

Regulators describe a range rather than a standard:

• The SEC's investor bulletin on indexed annuities (July 31, 2020) says the surrender period typically lasts six to ten years, or even longer, after you purchase the annuity.
• FINRA's article on indexed annuities (July 14, 2022) says surrender charges usually apply to withdrawals within the first six to 10 years after purchase.
• Investor.gov's variable annuity page (as viewed in October 2026) says that typically, after six to eight years or sometimes as long as ten years, the surrender charge may no longer apply.

Washington State's Office of the Insurance Commissioner (as viewed in October 2026) adds that the fee is higher in the early years and may get lower or go away over time. The only schedule that matters is the one printed in your contract, so find it before you sign.

Free-withdrawal provisions

Investor.gov's variable annuity page (as viewed in October 2026) walks through a hypothetical $100,000 contract with a surrender charge that starts at 7% in the first year and drops by one percentage point each year, plus a provision letting you withdraw 10% of contract value each year free of the charge.

If you withdraw $50,000 in the first year, the first $10,000 is free. The remaining $40,000 is charged 7%, so you pay $2,800 in surrender charges. The same withdrawal in a later year would cost less, and after the schedule ends it would cost nothing in surrender charges.

More generally, Investor.gov says contracts often allow you to withdraw a portion of your account value each year without paying a surrender charge. The details differ from contract to contract, so ask:

1. Is the free amount a percentage of the current contract value, of your purchase payments, or of earnings?
2. Does it start in the first contract year, or only after the first anniversary?
3. If you skip a year, does the unused amount carry forward, or is it lost?
4. Do required minimum distributions from an IRA annuity count against the free amount or get treated separately?
5. Are there circumstances, such as a nursing home stay or terminal illness, in which the contract waives the charge, and exactly how does it define them?

Get the answers from the contract or in writing from the insurer, not just from a sales conversation.

"Free" doesn't mean free of everything

A free-withdrawal provision waives the surrender charge, and only that. Other consequences can still apply:

• Taxes. For 2025 returns, IRS Publication 575 says withdrawals from a nonqualified annuity before the annuity starting date are allocated first to earnings, which are taxable, and then to your cost. The same 2025 publication says most distributions from nonqualified annuity contracts before age 59½ face an additional 10% tax on the taxable part unless an exception applies.
• Lost interest. The SEC's 2020 indexed annuity bulletin warns that if you take money out before the end of a crediting period, not all of that period's return may be applied.
• Smaller benefits. Investor.gov says withdrawals may reduce benefits such as death benefits, and the reduction may even be larger than the amount you withdraw.

Market value and interim value adjustments

Some annuities can change your contract value when you withdraw or transfer money before the end of a specified period. Investor.gov calls these market value adjustments or interim value adjustments and says they are often negative, can significantly lower the value of your annuity, and come in addition to any surrender charge. It notes that both RILAs and registered market value adjustment annuities contain contract adjustment features. Ask whether your contract has one and how it is calculated.

Exchanges can restart the clock

Replacing one annuity with another can cost you twice. Investor.gov says you may owe a surrender charge when exiting the old annuity and may also start a new surrender charge period with the new one. It cautions that some financial professionals may have a financial incentive to recommend an exchange, and suggests comparing the features, fees, rates and risks of both contracts before agreeing. Washington's insurance commissioner puts it simply: if an agent who sold you an annuity last year now recommends replacing it, ask why.

Questions to ask before you sign

• How many years does the surrender schedule run, and what is the charge in each year?
• Does each new payment start its own schedule?
• What can I withdraw each year without a surrender charge, and when does that begin?
• Does the contract have a market value or interim value adjustment?
• How would a withdrawal affect any death benefit or income rider?
• If I needed most of this money within a few years, what would I get back?

Investor.gov's own question is a good summary: do you intend to keep your money in the annuity long enough to avoid surrender charges, tax penalties and contract adjustments? If the honest answer is "maybe not," the surrender schedule is a reason to pause.

Key takeaways

• A surrender charge is a percentage taken from withdrawals during the surrender period, and it usually declines year by year.
• Regulators describe typical surrender periods of roughly six to ten years, sometimes longer; your contract's schedule is what counts.
• Free-withdrawal provisions waive the surrender charge on a limited amount each year, but taxes, lost interest and benefit reductions can still apply.
• Market value and interim value adjustments are separate from surrender charges and are often negative.
• An exchange into a new annuity can trigger a charge on the old contract and start a new schedule.

Sources

• U.S. Securities and Exchange Commission (Investor.gov), Annuities
• U.S. Securities and Exchange Commission (Investor.gov), Variable Annuities
• SEC Office of Investor Education and Advocacy, Updated Investor Bulletin: Indexed Annuities (July 31, 2020)
• FINRA, The Complicated Risks and Rewards of Indexed Annuities (July 14, 2022)
• Washington State Office of the Insurance Commissioner, Learn how annuities work
• Washington State Office of the Insurance Commissioner, What to consider before buying or replacing an annuity contract
• Internal Revenue Service, Publication 575 (2025), Pension and Annuity Income