Whether you should save an old variable annuity depends on the specific contract, not on annuities as a category. The answer turns on four things: the guarantees you locked in, the annual fees you pay, any surrender charges still in force, and the tax cost of moving the money. An older contract can be worth keeping or worth replacing.
In the short above, Austin explains why these contracts deserve a careful read rather than a quick reaction. This article expands on what to look at before you decide.
What is a variable annuity, and why do old ones get complicated?
A variable annuity is a contract with an insurance company that holds investments, called subaccounts, that rise and fall with the markets. The money grows tax-deferred until you withdraw it, and many contracts add optional guarantees for an extra annual cost.
Older variable annuities get complicated because they carry layers added over many years. A contract bought a decade or more ago may include features that are no longer sold, fees that are hard to find on a statement, and surrender rules tied to the original purchase date. Two people can own contracts with the same name and hold very different terms, which is why a blanket rule does not work.
How do you decide whether to keep a variable annuity?
Start by reading the actual contract and the most recent statement together. The goal is to understand what you own before comparing it to anything else. Four questions guide the review:
- What guarantees did you lock in? Look for living benefit riders such as a guaranteed income base or a guaranteed minimum withdrawal. These were often more generous in older contracts than in products sold today.
- What are you paying each year? Add the mortality and expense charge, the rider fees, and the underlying fund costs. The total is often higher than owners expect.
- Is a surrender charge still in force? Many contracts impose a declining penalty for cashing out early. Knowing where you stand in that schedule changes the timing of any decision.
- What is the tax cost of moving? Gains in a non-qualified annuity are taxed as ordinary income when withdrawn, so the embedded gain matters.
Only after answering these can you compare the contract to the alternatives. Because the answer blends investment terms with tax consequences, this is a natural place for coordinated financial planning that looks at both sides at once.
What are the costs and guarantees to weigh?
The honest tension with an old variable annuity is that the same contract can hold a high cost and a valuable promise at the same time. Looking at one without the other leads to a poor decision.
| Factor | Why it can favor keeping | Why it can favor changing |
|---|---|---|
| Living benefit rider | An older guarantee may pay more than today's products offer | If you will not use the income feature, you may be paying for nothing |
| Annual fees | A rich rider can justify the cost | High fees with no used benefit drag on growth |
| Surrender charge | Waiting until it expires avoids a penalty | A long wait may not be worth keeping a poor contract |
| Embedded gains | Deferral keeps taxes off the table for now | A 1035 exchange can move gains without current tax |
A rider you will never use is a cost without a benefit. A rider that guarantees income you plan to draw can be worth more than its price. The work is matching the contract's features to how the money actually fits your broader retirement income plan.
What are the alternatives to keeping it?
Keeping the contract as is sits at one end of a range. Several other paths exist, and each carries trade-offs worth understanding before you act.
- Hold it and use it as designed. If the rider is valuable and you will use it, leaving the contract alone can be the strongest choice.
- Hold it but stop adding to it. You can keep the existing guarantee while directing new savings to lower-cost accounts.
- Do a 1035 exchange. Moving to a newer annuity can cut fees or update features without triggering tax, but it often resets the surrender clock and cancels the old rider.
- Surrender and reinvest elsewhere. Cashing out frees the money for other uses, though it can mean surrender charges and a taxable gain in the year you do it.
There is no default answer here. The right path depends on the numbers inside your contract and how this money supports the rest of your plan. Because moving annuity money has tax consequences, having a CPA on staff means the investment decision and the tax decision get made together rather than in isolation. That same lens applies when an annuity is part of an estate, where estate planning and beneficiary choices can change the outcome for your heirs.
Who should review an old variable annuity?
Anyone holding a variable annuity bought years ago, especially near or in retirement, benefits from a fresh review. Contracts purchased through a former adviser, inherited from a family member, or set up before a job change are common candidates that often go unexamined for years.
A review does not assume the contract is good or bad. It replaces guesswork with facts: what you own, what it costs, what it guarantees, and what changing it would trigger.
If you own an old variable annuity and want a clear, unbiased read on whether it still fits, schedule a conversation with our team and we will walk through the contract with you.
This article is educational and is not personalized investment, tax, or legal advice. Wealth Ease Wealth Management is a registered investment adviser; consult a qualified professional about your specific situation.
Frequently asked questions
Should I keep an old variable annuity?
It depends on the contract, not on annuities in general. The decision turns on the guarantees you locked in, the annual fees you pay, any surrender charges still in force, and the tax cost of moving the money. An older contract with a valuable rider can be worth keeping even if the fees look high.
What is a surrender charge on a variable annuity?
A surrender charge is a fee the insurance company applies if you withdraw more than the allowed amount or cash out the contract before a set period ends, often six to ten years. The charge usually declines each year and eventually reaches zero, which is why timing any change matters.
What is a 1035 exchange?
A 1035 exchange lets you move money from one annuity or life insurance contract into another without triggering income tax on the gains. It can lower fees or improve features, but it can also reset a new surrender period and forfeit valuable guarantees, so the trade-offs deserve a close look first.
Do variable annuities have living benefit riders?
Many older contracts include living benefit riders, such as guaranteed income or guaranteed withdrawal features. These were often more generous years ago than what is sold today. Surrendering the contract usually cancels the rider, so it is important to read the contract before making any change.