Annuity selling: How you can cash in an annuity for more than surrender value
Selling an annuity for cash
Annuity selling - the best option for some
If you have an annuity that you need to give up, surrendering it could leave you nursing big losses from surrender fees and tax charges so an option to consider is selling your annuity. Many people buy annuities because they promise safe returns and a guaranteed income. But they are also investments that carry very high fees and lock money up for years.
The typical commission on some kinds of annuities is about 7%, which is a high bar that has to be overcome before your investment even breaks even again. And most also charge high exit, or surrender, fees if you try to get your money back. These are highest in the early years of annuities, in some cases the penalty for surrendering can be 17% in the first year, and you may have to hold the annuity for longer than 10 or 15 years to be free of these surrenders.
In addition people younger than 59 who are surrendering an annuity can end up paying a tax charge to the government. That's because many annuities are tax deferred and the tax break that the government gave gets taken back. So people who have recently bought an annuity and want to give it up can end up losing a quarter of their investment. That is a steep loss to have to take early on.
The problem is that most people who have been sold annuities haven't had all of this explained to them and they are not appropriate for many investors. Retirees, for instance, may not want to lock up their money for 15 or 20 years and most investors would probably be better off buying products that have lower sales commissions. Some have also been sold variable annuities when they would have been better off with fixed annuities
One option that some people may wish to consider is annuity selling. A growing number of firms now buy annuities for a lump sum in cash. In exchange they get the right to take the payments that are due to come out of the annuity in coming years. In most cases they then bundle these up into a package and sell them onto investors such as hedge funds that want steady returns that are not correlated with other investment markets. However not all annuities are eligible for selling and you need to think hard and get good advice before making this decision. Even though it may cut the loss you would have made by surrendering an annuity and paying exit charges, there will still be some downsides. The first is that the company buying it will want to make its own profit, so you will not get the full value of your annuity. The second is that you are giving up the benefits of the annuity - if you originally bought it because you wanted a safe and predictable income for retirement you need to assess how else you will get this is you cash in the annuity.
Getting out of annuities
Once you are stuck in an annuity you don't have too many options for getting out. Here are some tips to help evaluate your choices and to see whether annuity selling in the secondary market is your best bet.
- The first thing to do is to contact the insurance company that sold it to you and get them to explain all of your options. There may be some that you don't know about. Depending on your circumstances it may, for instance, be best to wait a year or two as that may make a big change in the surrender charge you have to pay. The company may also be able to offer you options to restructure your annuity to make it fits your needs better. If you have a variable annuity they may be able to switch you to a fixed annuity
- Find out whether there is a penalty-free amount you are allowed to draw and take that first. Sometimes this is an annual amount so you can do this more than once
- Get tax advice as to whether you will be hit for a federal tax charge on the growth of your annuity. A good adviser should also be able to tell you whether your annuity is eligible for selling.
- Call several companies that buy annuities to get quotes and advice. Rates that they will pay vary considerably so you want to hear from several of them. Then do your research on each to see if there have been consumer complaints or lawsuits against the company you are considering.
Annuity selling is not a decision that should be taken lightly and without all the facts and good advice, but for some it offers and escape or a lump sum in cash without surrender charges and fees.
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