What do investors incur if they withdraw capital before annuitization?

When investors withdraw capital from an annuity before the annuitization phase, they typically incur a surrender charge. This charge is a penalty imposed by the insurance company to discourage early withdrawals and to compensate for the costs associated with issuing the annuity. Surrender charges can vary in amount, often decreasing over time as the investor holds the annuity longer.

The rationale behind this fee is that annuities are designed as long-term investment vehicles, and the intention is to allow the investment to grow over time. Withdrawing funds prematurely undermines this structure and detracts from the financial projections expected by the issuer. Hence, investors should always consider the terms of the annuity contract regarding withdrawal procedures, potential penalties, and the timeframes for surrender charges, as these can significantly impact their returns.