Glossary

Free withdrawal provision

An annuity clause that lets you take out a set share of the contract value each year, often 10%, without paying a surrender charge.

Also called: penalty-free withdrawal, free withdrawal allowance

A free withdrawal provision is the part of a deferred annuity contract that lets you take money out during the surrender period without triggering a surrender charge, up to a stated limit. The most common allowance is 10% of the contract value (or of premiums paid) per contract year, though some contracts allow nothing in the first year or more in later years. The base and timing vary, so check your own contract.

Say, hypothetically, you hold a $100,000 fixed annuity with a 10% free withdrawal provision and a 6% surrender charge in year three. You could withdraw $10,000 that year with no charge. If you took $25,000, the extra $15,000 would be charged 6%, or $900. Many contracts also waive charges for nursing home confinement, terminal illness or required minimum distributions from an IRA annuity.

The allowance usually doesn't carry over: an unused 10% this year rarely means 20% next year. A market value adjustment may apply to amounts above the free amount, and taxes are separate. Withdrawn gains are taxable, and taking them before age 59½ may add a 10% IRS penalty. See annuity surrender charges and free withdrawals.

Last reviewed October 4, 2026

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Related terms

Surrender charge A fee deducted from a policy's or annuity's value if you cancel or withdraw too much in its early years, usually shrinking each year. Surrender period The years after purchase during which cancelling or over-withdrawing from an annuity or permanent policy triggers a surrender charge. Deferred annuity An annuity that grows tax-deferred for years before income begins, used to build retirement savings or lock in future lifetime payments. Market value adjustment (MVA) A change to an annuity's surrender value on early withdrawal, up if interest rates have fallen since purchase and down if they have risen. Fixed annuity An annuity that credits a rate set by the insurer, with principal protected from market losses, either deferring growth or paying fixed income.

Related guides

Annuity surrender charges and free withdrawals How annuity surrender charges work, the free-withdrawal allowance, market value adjustments, waivers, and what it costs to leave a contract early. Withdrawing cash value from a life insurance policy How partial withdrawals from permanent policies work, what they do to the death benefit, when they are taxed, and how they differ from loans and surrender.