What purpose do surrender charges serve in an annuity?

Surrender charges play a crucial role in protecting the financial integrity of the annuity product and encourage long-term investment. They are fees that an investor incurs if they withdraw funds from the annuity before a specified period has passed, usually referred to as the surrender period.

By imposing these charges, insurance companies discourage early withdrawals, ensuring that they can manage their financial commitments and allow the investment to grow undisturbed for a longer time. This approach helps maintain the overall stability of the annuity product and preserves benefits such as guaranteed growth and the potential for higher returns that come with a longer investment horizon.

When investors are aware of these charges, they often think twice before making a withdrawal within the early years, fostering a more committed investment strategy that aligns with the intended purpose of long-term savings and retirement planning.