Should I Keep My Annuity or Move It? 8 Things to Check First

Check eight items on the contract before you keep it, exchange it, or cash it in. The surrender charge, the income base, the rider fees, and the tax can cost more than the reason you were given to move.

This is a checklist, not a ranking of products. A full annuity review uses your statement. The notes below tell you what to pull off that statement first.

The eight checks

1. Is a surrender charge still in force? Find the contract date and the charge schedule. “The period is almost over” is not the same as a zero charge today.
2. What is the account value, and what is the income base? The account value is closer to cash. The income base is often a number used only to calculate a future payment. Walking away can mean giving up the larger number.
3. What do the riders cost each year? An income rider or a death-benefit rider can charge a percent of the benefit base, not of the account value. Add mortality and expense charges if the contract is variable.
4. What does the death benefit pay? Some contracts pay the account value. Some pay a higher benefit base. Moving the contract can replace that benefit with a new one that starts over.
5. How much can you take without a charge? Many contracts allow a free withdrawal, often up to a set percent of the account value each year. That is not the same as a full surrender.
6. What is the tax if you surrender? Gain inside a non-qualified annuity is generally ordinary income when you take it out. An IRA annuity is taxed under the IRA rules. The two are not the same bill.
7. What does a 1035 exchange keep? A transfer from one annuity to another can defer tax under IRC Section 1035. It does not preserve every rider, and it does not erase the reason you bought the first contract.
8. Does the new contract start a new surrender period? A replacement that looks cheaper can lock the money up again for five to ten years. Compare the new charge schedule before you sign.

A simple example

These numbers are hypothetical. They are not a quote.

A contract shows an account value of $180,000 and an income base of $240,000. The surrender charge this year is 5 percent of the account value, about $9,000. The income rider costs 1 percent of the income base, about $2,400 a year.

If the owner surrenders, they may receive about $171,000 before tax, and the $240,000 income base is gone. If the annuity is not inside an IRA, the gain over what they paid is generally taxed as ordinary income in the year they cash out. A 1035 exchange might defer that tax and still start a new surrender schedule on the new contract.

The useful question is whether the income base and the rider are worth $2,400 a year plus the $9,000 charge to leave. That answer depends on age, the payout rate, and whether anyone still needs the death benefit.

What changes the answer

• Qualified or not. An annuity inside an IRA is already tax-deferred. Cashing it out follows IRA rules. A non-qualified annuity adds the gain to ordinary income.
• Age and the payout. An income base matters when someone is close to turning on income. It matters less when the rider will never be used.
• The free-withdrawal amount. A partial withdrawal inside the free amount is a different decision from a full surrender.
• A replacement illustration. Caps, participation rates, and fees on the new contract have to beat the old contract after the new surrender period, not before it.

The common mistake

People treat the end of the surrender period as a deadline to move. The charge going to zero only means the exit is cheaper. It does not raise the income base, and it does not lower the tax. The other mistake is comparing the income base to a bank balance. The income base is not cash on hand.

Questions to ask before you move it

• What is the surrender charge in dollars if I leave this month?
• What is the account value, and what is the income base?
• What do I pay each year for riders I do not use?
• If I die this year, what does the beneficiary receive?
• How much can I withdraw this year with no surrender charge?
• If I exchange it, what new surrender period starts, and which riders do I lose?

When a review helps

Ask for a review when someone has proposed a replacement, when the surrender charge is about to end, or when you cannot tell the account value from the income base. Bring the contract and the latest annual statement.

The comparison is the work on the annuity review page. Sometimes the result is to keep the contract.

If you want that comparison before you sign a replacement, request an annuity review.