When to Shop for Annuities (Even If You Already Have One)

If you’re interested in using an annuity for retirement income, it’s important to buy one at a strategic time. If you already have an annuity, it may be in your best interest to shop around for something better – but your timing needs to be right to lock in an attractive crediting rate and avoid surrender fees.

When Should You Buy an Annuity?

Many people use annuities to secure a steady stream of retirement income. For this reason, older adults often buy annuities when they are retired or getting ready to retire.

The exact timing will come down to your specific financial situation and whether you’re purchasing an immediate or deferred annuity. Immediate annuities start providing payouts soon after purchase, meaning you don’t need to buy one until shortly before you’re ready to start receiving payments. On the other hand, deferred annuities start providing payouts at a predetermined future date, which means you can buy one well in advance of when you need the payments.

What If You Already Have an Annuity?

If you already own an annuity, you may be able to secure a better deal by shopping around for a new one. How this works will depend on the type of annuity you currently have.

Fixed Annuities

Fixed indexed annuities provide a minimum crediting rate. Other fixed annuities offer a fixed crediting rate established in the contract along with guaranteed payouts. Timing can make a big difference when it comes to this crediting rate. If you buy when interest rates are high, you may be able to secure a much higher crediting rate, which could translate to larger payouts.

Interest rates have been quite high recently. If you bought your fixed annuity when rates were lower, you might be able to secure a much better crediting rate by shopping around now.

Variable Annuities

With variable annuities, the interest rate at the time of purchase is less important because the crediting rate varies depending on the performance of the underlying investments. However, switching from a variable annuity to a fixed annuity could enable you to lock in a higher crediting rate.

If you purchased your annuity when interest rates were low, a variable annuity may have seemed like the best way to receive a decent return. Unfortunately, this is completely dependent on the underlying investments. If they experience a downturn, your annuity may lose value. You may also get hit with high fees on a variable annuity, which eats into its value. Switching to a fixed annuity now is one way to avoid high fees while locking in a good crediting rate and avoiding decreases in your annuity’s value from market downturns.

Beware of surrender changes! Although shopping around for a new annuity may be a smart move, there is one big drawback to switching annuities: you may face a surrender charge. The good news is you can avoid this problem by carefully timing the switch.

Understanding the Surrender Charge Period

Annuity contracts typically impose a surrender fee if the owner of the annuity withdraws funds or cancels the contract during the surrender period.

Although surrender fees are common, the terms vary significantly depending on the contract and the annuity company:

• Length of surrender period. Some surrender periods last a decade, while others are only a few years. If you withdraw money or cancel your contract before the surrender period ends, you will face the surrender fee.
• Size of surrender fee. The surrender fee is typically a percentage of the amount you withdraw. Many annuity contracts have surrender fees that decrease each year. For example, if you make a withdrawal in the first year, your fee may be 6%, but if you make a withdrawal in the second year, it may drop to 5%, and so on.
• Exempt withdrawals. Many annuity contracts allow the owner to make small withdrawals without facing a penalty. The contract will state the maximum amount you can withdraw early without a penalty, if this is allowed.

In addition to the surrender fees charged by the annuity company, the IRS may levy a penalty. Whether this happens depends on your age. The IRS early distribution penalty is a 10% tax on pension or annuity payments that an individual receives before reaching age 59½.If your annuity is qualified, this penalty will apply to the entire early withdrawal amount. If it is non-qualified, it will only apply to the earnings portion of the withdrawal.

Avoiding the Surrender Fee

Surrender fees are often quite expensive. Let’s say you have an annuity worth $200,000 with a surrender fee of 6%. If you cancel the annuity, you will face a fee of $12,000. If the IRS early distribution penalty applies, you’ll lose even more money to taxes.

To avoid the surrender fee when you cancel your annuity, you’ll need to wait for the surrender period to end.

• Identify the end of your surrender period. Let’s say you have an annuity with an eight-year surrender period. If you bought it on April 1, 2017, you’d have to wait until April 1, 2025, to cancel it without facing a surrender fee. Make sure you know the exact date you purchased your annuity.
• Watch out for IRS penalties. If you are younger than 59½ years old, you will face a hefty tax penalty for early distribution. It might make sense to wait, especially if you’re close to the cutoff age. If you are younger than 59 1/2, you can avoid this penalty by transferring your money to a new annuity instead of cashing out. This will allow you to take advantage of higher rates without owing more to the IRS.
• Maintain emergency savings. Annuities are a smart way to obtain retirement income, but it’s also a good idea to have some emergency savings available as cash. That way, you won’t face penalties if you need to use some of your money before you had planned to.

Some annuity contracts are stricter than others. This often depends on the type of annuity – for example, variable annuities tend to have more fees than fixed annuities – as well as the annuity company. Read the fine print and make sure you understand all the fees that could apply.

What Will 2025 Bring?

Interest rates have been high. This has been frustrating for people who want to borrow money, but it may be good news for anyone who wants to buy a fixed annuity. It’s unclear how long this opportunity will last.

According to Investopedia, the Federal Reserve cut interest rates three times in late 2024. As of January 2025, the Fed is holding interest rates steady, but this could change. Many experts believe more rate cuts will be announced by the end of the year. If you want to take advantage of higher rates, it’s important to act before these cuts happen.

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How to Shop Around for the Best Annuity

This is a good time to check your current crediting rate and shop around for a better annuity – you might be able to find a much better deal. If comparing rates and canceling your old annuity sounds like a lot of work, don’t worry. We’ll do all the work to transfer your funds – you can just sit back and watch your money grow. Contact us.