How to Get Out of an Annuity (Without Losing More Money)

If you regret buying an annuity, you are not alone. Many people were persuaded by a sales rep with promises like “guaranteed income” or “no downside risk,” only to discover later that:

 

• Fees are higher than expected
• Access to money is limited
• Growth isn’t keeping up
• Terms are confusing and inflexible

 

The good news: there are smart, legal ways to exit an annuity if it no longer fits your financial goals. And in some cases, you may not need to exit at all – you might just need a better strategy.

 

This guide shows you how to evaluate whether getting out makes sense, what it really costs, and the most strategic ways to move forward.

 

---

Step 1: Understand What Type of Annuity You Have

 

Your exit strategy depends on what kind of annuity you’re in:

 

 

 

 

Your contract will reveal everything – fees, surrender schedule, riders, guarantees – but reading annuity paperwork is… painfully confusing.

 

This is where having a fiduciary financial planner help review the details protects you from making a costly mistake.

 

---

Step 2: Check Your Surrender Charge Schedule

 

Most annuities have long lock-up periods(commonly 7–10 years). If you exit early, you pay a surrender charge, which typically declines each year.

 

Example:

 

• Year 1: 10% penalty
• Year 5: 5% penalty
• Year 9: 0% penalty

 

Before you do anything, calculate:

 

“What does it cost to stay… versus what does it cost to leave?”

 

Sometimes waiting just one more year could save you thousands.

 

---

Step 3: Understand the Tax Consequences

 

Exiting the wrong way can accidentally trigger taxes.

 

You may owe:

 

• Ordinary income tax on gains
• 10% IRS penalty if under age 59½
• Embedded taxes if your annuity grew in value

 

However... a smarter exit may avoid immediate taxes. Enter the 1035 exchange.

 

---

Step 4: Use a 1035 Exchange to Move Your Money

 

A 1035 exchange allows you to transfer your annuity into another annuity or into life insurance:

 

✔ No taxes triggered on gains
✔ Can move into lower-cost options
✔ Often preserves guaranteed benefits

 

This strategy helps people escape:

 

• High fees
• Bad investments
• Poor riders
• Sales-heavy products

 

But again – only if it fits your plan.

 

---

Step 5: Cashing Out (Sometimes Still Worth It)

 

If the annuity is truly harming your financial future, cashing out may be the best option even if surrender charges apply.

For example: If your annuity earns 2% but the rest of your portfolio earns 7–8%, staying could cost you far more over time than the penalty.

 

The key question:

“Is this annuity helping or hurting my long-term plan?”

 

If it’s hurting – leaving faster may cost less overall.

 

---

Step 6: Consider Partial Withdrawals

 

You may not need to cash out the entire annuity. Most allow 10% per year penalty-free. This can help you:

 

• Unlock some liquidity now
• Reduce surrender charges over time
• Transition your funds gradually

 

It’s a good strategy when you’re mid–lock-up and don’t want a huge penalty at once.

 

---

Step 7: Look at the “Benefits” Before Giving Them Up

 

Some annuities include features that could be valuable:

 

• Lifetime income guarantee
• Enhanced death benefit
• Long-term care rider

 

Ask: Are you losing something important by leaving? A professional review should weigh the real dollar value of the benefit versus the cost of staying.

 

---

How a Fiduciary Advisor Helps You Get Out of an Annuity

 

Most annuities are sold by commission-based agents, which can create pressure and conflicts.

 

A fee-only fiduciary sits on your side of the table. We:

 

• Evaluate whether you should keep or exit
• Explain the true costs and risks in plain English
• Help you avoid tax traps and penalties
• Build a better strategy with your entire financial life in mind

 

Sometimes, the right answer is: keep the annuity – but use it differently. And sometimes, it’s: exit now and stop the financial bleeding. You deserve advice that’s not influenced by a commission check. We help clients with this through either our fee-only financial planning service , or our wealth management service .

 

---

Common Mistakes People Make When Exiting an Annuity

 

Avoid these traps:

 

❌ Surrendering without reviewing tax implications
❌ Losing valuable benefits without realizing it
❌ Canceling without seeing if a 1035 exchange helps
❌ Triggering fees by withdrawing too much at once
❌ Taking advice from the same person who sold it

 

Exiting should be strategic, not emotional.

 

---

Real-World Example

 

John purchased a variable annuity at a dinner seminar.

 

• Fees: 3.4% per year
• Growth: flat for 6 years
• Surrender charge remaining: 4%

 

John worked with a fee-only financial planner , who helped him:

 

1️⃣ Do a partial penalty-free withdrawal
2️⃣ Use a 1035 exchange for the remaining balance
3️⃣ Move funds into a well-diversified portfolio

 

Even with a small surrender cost, John is now on track for meaningful long-term growth – instead of paying a salesperson forever.

 

---

FAQs

 

Q: How can I get out of an annuity without penalties?
Use partial withdrawals, 1035 exchanges, or wait until surrender charges expire.

 

Q: Can I cancel an annuity I was pressured into?
Usually yes – but the cost depends on your contract and how long you’ve owned it.

 

Q: Is it ever smart to keep an annuity?
Yes. If the income guarantees or riders genuinely support your retirement plan, staying might be best.

 

Q: Can I sue the agent who sold me a bad annuity?
Possibly – but most people can exit without legal battles by restructuring properly.

 

Q: How do I find someone I can trust?
Look for a fee-only fiduciary – not someone earning a commission from selling annuities.

 

---

Ready to Get Out of a Bad Annuity?

 

You don’t have to stay stuck. A strategic review can help you:

 

• Reduce or avoid penalties
• Avoid unnecessary taxes
• Protect and grow your retirement savings

 

Schedule a no-pressure annuity review and finally know your options. Contact Us to get a Fiduciary Review of Your Annuity

 

Your Partners in Southern Wake County

 

As Holly Springs and Fuquay-Varina continue to grow, having a local adviser matters more than ever. BSG Advisers is just a short drive up the road in Downtown Apex . We provide the personalized attention that online algorithms can't, serving the dynamic families and businesses expanding across Southern Wake .