We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Surrender Charge?

Mary McMahon
Updated: Jan 24, 2024

A surrender charge is a fee which is charged when someone cancels or cashes out an annuity before it matures. Ostensibly, surrender charges are designed to compensate the institution which administers the annuity for the cost of managing and maintaining the annuity; under normal circumstances, the routine fees associated with the annuity cover these costs, but when the annuity is canceled early, these costs have not yet been recouped. Information about surrender charges is included in the contract signed when the annuity is purchased, and it is a very good idea to read through such contracts closely.

Annuities are designed to provide people with set, predictable income. They are usually structured in a way which makes them tax-free, and intended for people to use for income during retirement. Annuities can be purchased through life insurance companies and other types of financial institutions, and they are viewed as a long term investment. Many of the terms in the structure of an annuity are specifically designed to penalize short term investors, which is something to be aware of.

When an annuity includes a surrender charge, if someone attempts to cash it out before it is mature, he or she will forfeit a percentage of the value of the annuity. The percentage starts out high, dwindling to zero over the course of the annuity's lifetime. Someone who cashes out an annuity after a year, for example, might have a surrender charge of 10%, while someone who cashes out after 15 years might incur no surrender charge. The length of the term varies depending on the organization which issues the annuity.

Another issue with the surrender charge is that when an annuity is cashed out early, it often triggers tax penalties. This means that in addition to paying fees for early cancellation, investors would also incur tax liability which could significantly drive up the cost of cashing out early. People should consult their accountants before cashing out an annuity, keeping in mind that the funds are highly illiquid and that as a general rule people should avoid cashing out an annuity before it is mature.

Some financial advisors feel that annuities are not very sound investments because they penalize short term investment, and they can come with highly restrictive terms which can be come problematic. People who are interested in buying annuities may want to consult an accountant or financial advisor to get advice on the best product to buy, and certain things to avoid.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.