Retired Nurse’s $450,000 Pension Is Stuck in an Annuity With an 11% Surrender Fee

“The return is negative right now on these particular annuities.” That is how a caller named Crystal described her retired mother’s savings on a recent episode of The Ramsey Show, hosted by George Kamel and Jade Warshaw.

Her mother spent 30 years working as a nurse. About five years earlier, she placed her entire pension of roughly $450,000 into what she thought was an investment, but it was actually a fixed annuity from a life insurance company.

According to Crystal, her mother is “locked in for like 12 years paying fees.” The surrender charge equals 11% of the $450,000 balance. The contract guarantees only 87.5% of the premium, and the money is “basically all of my mom’s income.”

Leaving now would cost $49,500. Kamel said the salesperson likely “preyed on her fears of market volatility.” The S&P 500 had risen about 13% for the year at the time of the episode, and remained up about 12% in the current comparison. That gain alone would have covered the exit fee. Even the 10-year Treasury yields about 5%, while this supposedly safe product is losing money.

They Identified the Problem, but the Exit Is a Separate Calculation

Warshaw called it a stupid tax, explaining that it is “what takes place when you make a choice without having all the information.” That assessment makes sense. A retiree’s only source of income was tied up for more than a decade in a product she did not understand.

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Years later, however, the original decision is already a sunk cost. Dave Ramsey summed it up in a later episode: “When you wouldn’t buy it again for what you paid for it, it’s time to sell it.” No one would choose this annuity today. The real question is whether paying to leave produces a better outcome than staying.

That comes down to a break-even calculation. If the full surrender charge applies, she would walk away with $400,500. If that money were shifted into Treasuries paying about 5% while the annuity earned nothing, the fee would be recouped in roughly 2.4 years. After that point, every additional year would be money she would not have earned by staying.

The comparison with the S&P should be made carefully. A strong year in the market is only visible in hindsight. A retiree relying entirely on stocks for income can be forced to sell during a downturn, which is the very fear the annuity was meant to exploit. Treasuries are the cleaner benchmark: liquid, predictable, and still ahead of a negative return.

Your Annuity’s Credited Rate Determines Whether Leaving Is Worth It

The key factor is the difference between what the annuity credits and what the alternative pays. In the example above, that gap is 5 percentage points, so break-even arrives in about 2.4 years.

If the contract actually credits 3% after fees and adjustments, using that as an illustrative figure, the gap narrows to 2 points. In that case, break-even stretches to around 6 years. If the surrender charge drops significantly during that period, waiting may be better than paying to get out now.

The alternative also matters. The national average 12-month CD pays under 2%. If the money were parked there instead, it could take much longer to recover the exit cost than it would in Treasuries.

Five Steps to Take Before Paying a Surrender Charge

1. Get the surrender schedule in writing. Ask the insurance company for the charge percentage in each remaining year, the current credited rate, and whether a market value adjustment applies. That adjustment often explains why a “fixed” product shows a negative value.

2. Review the free-withdrawal feature. Many fixed annuities allow about 10% of the balance to be withdrawn each year without penalty. On $450,000, that would be $45,000 a year, enough to create income or move the funds out gradually.

3. Do your own break-even analysis. Write down the dollar amount of the surrender charge, the annuity’s true credited rate, and the rate on a Treasury you could buy today. If the alternative earns back the fee long before the penalty ends, leaving is the better move.

4. Preserve the tax treatment when moving out. Pension money rolled into an annuity is usually tax-deferred. Use a direct transfer to an IRA instead of taking a check, which could trigger income taxes.

5. Work with a fiduciary. Kamel recommended “an actual, credible financial advisor and not an insurance agent.” He also wanted her mother to make decisions “out of a place of strength and confidence,” so she would not abandon the new plan at the first market decline.

A surrender charge is a cost that can be measured. Once you know how long the alternative needs to earn it back, you know whether staying or leaving makes more sense. Turning a lump sum back into reliable monthly income is a separate project, and we outlined the mix, payment schedule, and withdrawal order in a free guide to the Paycheck Portfolio method.

Help Avoid These 13 Retirement Mistakes Before They Derail Your Future

One investment mistake could create major risks for your retirement. Many investors make the same critical errors: being overly conservative, making big bets on “sure things,” or paying excessive fees. Any of those mistakes can put hard-earned savings in danger.

You can learn the mistakes even experienced investors make, along with ways to avoid them before it is too late, with this new guide: 13 Retirement Mistakes and How to Avoid Them from Fisher Investments. (sponsor)