Think Twice Before Cashing Out Your Annuity

          We've had a variable premium since 2000, and the cash value is now about $10, 000 less than I at first used. I'm ready to cash out. What are the reasons I actually shouldn't?

It can be tempting to switch out of the pension that has suffered loss over the past several years, but which may be exactly the reason you may want to retain it. In the event that your variable annuity has any income or drawback guarantees, then you could jeopardize those valuable benefits if you cash away or switch to another annuity.

The specific assurances change from one annuity to another, but here's an example of how one can work: An premium with a guaranteed nominal income benefit, for example, may enable you to withdraw up to 6% of your initial investment every season, regardless of how the underlying investments perform (you actually choose how to make investments your money from a menu of mutual fund-like sub-accounts). So if you invest, say, $100, 500 in the annuity, you could withdraw up to $6, 000 per 12 months, even if the assets lose money. And if the investments continue to perform poorly and decrease to almost nothing, you may still convert the award to a lifetime stream of income based on your current age and the original account value.

If the value of your investments increases, then you might be able to take twelve-monthly 6% withdrawals based on the higher amount--even if the investments generate losses later. For example, if your value increases to $120, 000, you could increase your twelve-monthly withdrawals to $7, 200 each yr. Then, even if the account value subsequently comes without reaches that level again, you could continue taking out $7, 2 hundred a year.

But will be certainly usually one big get: If you cash away the annuity, you may receive only the keeping account value, not the original investment or any stepped-up value. Say our hypothetical annuity's value increases to $120, 000 but later drops to $60, 000. Although you may continue taking $7, 200 every year as long as you kept the premium, you would be titled to $60, 000 if you cashed out or switched to another pension.

Not simply would you lose those guarantees if you cashed out, but if you decided to buy a new annuity in the future, you can even have a tough time finding one with guarantees as generous as those offered in 2000.

Another reason to think carefully before you make a change: Most variable annuities garnishment a surrender charge if you cash-out or move to another annuity within a certain time period. On many occasions, the surrender demand starts at 7% of your value if you cash-out in the first year and little by little lowers by 1% each yr, disappearing completely by 12 months seven. Before you move out of your pension, find out whether a person would have to pay a surrender charge and how quickly the charge lessens.


 The rules for premium guarantees and other benefits can be complicated, and vary greatly depending on specific annuity. Before you make any change, ask the annuity company how any guarantee is calculated, how much you're paying in fees, how much a person would get if you withdrew the bucks in a large sum now, and whether you'd be controlled by a surrender charge. (Part of every annuity withdrawal is taxable as ordinary income, and if it is held inside a pension account, the complete distribution is taxable at ordinary taxes rates. Nevertheless, you avoid an immediate tax hit when switching from one premium to another through a procedure termed as a 1035 exchange. )