Can I Cancel My Annuity?
If you are considering an immediate annuity, there are a few companies which provide a limited one-time discretionary withdrawal of some of your deposit without penalties. Other companies will permit you to request acceleration of future payments in advance.
However, in all instances, your monthly income will be reduced from that point forward. You will never be able to receive a refund of your entire premium under any circumstance because you began drawing down the principal from the very first payment, so some of it will have been returned to you already.
If you need a large sum of money, it may not be enough to accelerate a few future payments, and skipping future payments could compound your money woes. As a last resort, you may be able to sell your immediate annuity on the secondary market. There are some firms that arrange these sales.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
You would assign ownership of your income payments to another buyer who would get the right to receive them. This sale would give you a lump sum payment. Because the annuity would remain intact, there would be no surrender charges, but you may owe tax on the gains from the sale.
Multiyear or Index Deferred annuity
If you are considering a tax-deferred growth annuity, your premium earns interest during its so-called accumulation phase. All companies will allow you to cancel this type of annuity subject to surrender charges, which can be especially high (up to 15% or more of your account balance).
The surrender charges you face depend on the terms of your contract. A rule of thumb is that the earlier in the duration of the annuity that you wish to cancel, the greater the surrender charges will be. The schedule for those charges are listed in your contract.
If you can’t wait until surrender charges no longer apply, you may be able to do a partial surrender in which you take out only part of your premium. Many companies will waive surrender charges even on yearly partial surrenders up to a certain limit. The limit could be the amount of interest you're earning each year, or up to 10% of the account value each year.
In recent years, many index annuities provide at an extra cost a right to withdraw a certain percentage of your account every year.
Withdrawals usually come with a tax bill. With a growth annuity, the taxes on gains you accumulate in the contract are deferred until you begin taking withdrawals. But if you cancel your annuity, your gains would be taxable in that year. Also, if you are younger than age 59-1/2, the IRS imposes an extra 10% penalty tax in addition to ordinary income tax on the gains withdrawn.
As you shop for your annuity, I recommend evaluating whether the insurance company you're considering offers any waivers from early surrender penalties in the case of certain hardships like disability, a move to a nursing home, or terminal illness.
In addition, I recommend keeping cash outside of an annuity as an emergency fund. While many are tempted to put as much as possible into an annuity for the greatest possible payout, it is never a good idea to be left without some flexibility for the unexpected.