An annuity is not a particularly liquid instrument. Rather, it tends to be more of a buy-and-hold investment. This is because annuities were originally conceived and have always been intended for long-range planning, such as retirement. As a result, most deferred annuities have a surrender charge schedule built into them that penalizes—and therefore discourages—early withdrawals (sometimes limited withdrawals, such as 10% of the account value, are permitted free of surrender charges). A typical surrender charge might start at 10% and decline to 0% over a 10- or 15-year period. In other words, by holding the annuity for a long time, the annuitant can usually avoid all surrender charges.

The annuitant has numerous payout options from which to choose. You will notice, however, that all but one method requires the individual to pay the principal to the insurance company in exchange for a lifetime of payments. If the annuitant does not wish to do this, he or she can simply surrender the full value of the deferred annuity any time he or she wants. However, two factors come into play. First, the surrender charges may be significant and, second, federal and state income taxes on all earnings will be due and payable in full in the year of the surrender. Further, a full surrender or partial withdrawal before age 59½ will also be subject to a 10% penalty tax. (Annuitization over life expectancy, beginning before age 59½, is free of the penalty tax.)