What are the consequences of early withdrawal from an annuity?

Early withdrawal from an annuity typically results in surrender charges and penalties, which are designed to discourage policyholders from taking their money out before a specified period. These charges can significantly reduce the total amount received upon withdrawal, often decreasing the overall value of the investment in the annuity.

Surrender charges are common in annuity contracts and are assessed during the early years of the contract. They often diminish over time—the longer the money remains in the annuity, the lower the percentage of the charge. Additionally, early withdrawals may trigger income tax penalties, particularly if the owner is under 59½ years old, as these withdrawals are considered taxable income.

Understanding these consequences is crucial for investors because they can impact the long-term value and performance of the annuity. Investors should be fully aware of the terms of their annuity contracts before considering early withdrawals, as doing so may result in significant financial drawbacks.