An annuity is not a bad thing by nature. An income annuity is a pension you buy, and some people need exactly that. The trouble starts when someone owns one and cannot say what it costs, what it guarantees, or why they have it.
If that is you, do not cancel anything this week. I cannot tell you what to do with your contract from here, and nobody honest can without reading it. What I can give you is the order of operations.
If you bought it in the last few weeks
Check the date. The SEC notes that you can usually cancel a variable annuity within a short window, often 10 to 30 days, without a surrender charge. It is called the free look period, and your contract states how long it is.
The trap: money already in
“I put $150,000 into this. I cannot walk away.”
The $150,000 is in the contract whether you stay or go. The live question is whether staying is the best use of that money from today forward. The No-Memory Test asks it cleanly: if nobody had ever sold you this, and it were offered to you today, on today’s terms, would you buy it?
Hold that answer. Now get the numbers.
What nobody mentioned at the sale
In my experience, most people who own an annuity cannot say what it costs each year or how its return is worked out. Nobody told them. They find out years later, when the balance has barely moved past what a savings account would have paid.
There are two reasons that happens.
Variable annuities stack fees. The SEC’s guide walks through the layers: a base contract fee, with an example of 1.25% a year, administration fees of around 0.15%, the expenses of the funds inside, and extra charges for optional benefits. Using only the SEC’s two example figures, that is 1.40% a year before fund expenses and any add-ons. All of it comes out of your return, every year, whether the market is up or down.
Fixed and indexed annuities limit the return. A fixed annuity pays a rate the insurance company sets, and only the minimum rate is guaranteed. An indexed annuity is tied to a market index, but you rarely receive the index’s full gain. The SEC’s bulletin shows how: dividends are usually left out. A cap limits the gain, so with a 7% cap and a 12% index gain you are credited 7%. A participation rate of 75% turns a 10% gain into 7.5%. And the company can commonly change those terms over time.
The protection against loss is real. So is the price of it. A balance that creeps along at a cash-like pace is not a glitch. It is how the contract was built to work.
So ask one more question: “What was my return each year since I bought this, after all charges?”
Six numbers to request
Call the insurance company, not the person who sold it, and ask for these in writing.
1. The contract value today.
2. The surrender value today, and the date the surrender charge ends. The charge usually shrinks each year over six to ten years until it reaches zero. That end date matters more than almost anything else on this list.
3. What you put in. Contract value minus what you put in is your gain, and the gain is what gets taxed.
4. How much you can take out each year with no charge. Many contracts allow some. Ask what yours allows.
5. The total yearly cost, in percent and in dollars. Add up every layer from your own statement. For an indexed annuity, also ask for the current cap and participation rate.
6. What the guarantees are worth. An income benefit, a death benefit, a guaranteed rate. Sometimes a guarantee is worth more than the cash value. Leaving would mean throwing away something you already paid for.
What leaving costs
The surrender charge. That is number two.
Tax. FINRA puts it plainly: when you take money out of an annuity, gains are taxed at ordinary income rates, and before age 59 and a half you may also face a 10 percent tax penalty. A large gain taken in one year can push you into a higher bracket.
The guarantees. Once you leave, they are gone.
If the annuity sits inside an IRA, the tax picture is different. Ask a tax professional before you assume anything.
More choices than stay or cash out
You can wait. If the surrender charge ends in two years, the cheapest move may be a reminder on your calendar.
You can take the yearly amount the contract lets you withdraw without a charge.
You can exchange it for a lower-cost annuity. Be careful here. The SEC warns that an exchange can trigger a surrender charge on the old contract and start a new surrender period on the new one, and it tells you to think about what the person recommending the swap stands to earn.
You can turn it into income, which is the job it was built for.
Or you can cash it out.
Be angry at the sale if you like. Decide about the contract with a calculator.
Signs it may be worth keeping
The guarantee is worth more than the cash value. You want income you cannot outlive. The surrender charge is still steep. Or this would be a bad year to add taxable income.
Signs it may be time to plan your exit
The surrender period is over. You pay for benefits you will never use. You do not need guaranteed income. Or the gain is small, so the tax is small.
None of this is advice for your contract. Your six numbers decide it.
One more suggestion. Get a second opinion from someone who earns nothing whichever way you choose.
Related questions: variable annuity fees, added up, is a fixed index annuity a good idea, should I surrender my whole life policy and should I roll my 401(k) into an annuity.
One question for this week: do you know the date your surrender charge ends? If not, that is the first phone call.
As always, if you want to talk any of this through, the door is open. Genti