What is a surrender charge associated with annuities?

A surrender charge is specifically a fee that is imposed when an annuity holder withdraws funds from the contract before a specified period, often referred to as the surrender period. This charge is designed to discourage early withdrawals and helps the insurance company recoup some of the costs associated with the sale and management of the annuity.

The surrender period typically lasts several years, and the charge is usually tiered, decreasing over time. If a contractholder decides to withdraw more than a certain percentage or the total amount of their investment during this period, they would incur this surrender charge. Understanding this concept is crucial for investors, as it can impact their decision-making regarding when to access their funds within the annuity.