If an annuity is part of your retirement income plan, there’s a term you need to know: market value adjustment. It’s something that can be applied to your annuity contract if you withdraw money from the annuity or surrender it completely before the end of the contract term. An MVA can apply to different types of annuities, and it’s important to understand if you think you may take money out of your annuity before regular distributions begin.
What Is a Market Value Adjustment?
An annuity is a contract you buy from an insurance company. When you do, it’s on the assumption that in return for paying premiums you’ll receive distribution payments later. With an immediate annuity, those payments may start as soon as one year from purchasing the annuity. With a deferred annuity, payments may begin several years down the line. In the meantime, the money in your annuity grows on a tax-deferred basis.
The company you purchased the annuity from invests the premiums you pay in bonds. As a result, the value of your annuity is tied to interest rate movements; if rates rise the value of the bonds decline and vice versa.
The MVA can result in either an increase, if rates have risen, or decrease, if rates have fallen, of your annuity contract’s value. These adjustments can apply to fixed deferred annuities, fixed indexed annuities and life annuities that have a guarantee period.
Market Value Adjustment: How It Works
When your annuity’s value may be subject to a market value adjustment depends on the terms of the contract. Insurance companies can structure annuities to allow for penalty-free withdrawals each year, up to a maximum percentage of the annuity’s value. For example, you may be able to withdraw 10% of your contract’s value annually prior to beginning your regular annuity payments.
Besides allowing for penalty-free withdrawals up to a certain amount, your contract can also impose a surrender charge if you decide to surrender your annuity within a certain number of years after buying it. This fee is usually a percentage of the annuity’s value and it may decline over time the longer you own the annuity, eventually bottoming out at zero.
Two things trigger market value adjustments:
- You make a withdrawal in excess of the penalty-free withdrawal amount allowed, or
- You surrender your annuity in its entirety within the surrender penalty window.
For example, say your annual penalty-free withdrawal limit is 10% but you withdraw 20% from your annuity. The insurance company could apply an MVA to the 10% overage. Likewise, you may be subject to an MVA at any time during the window in which you’d be penalized for surrendering your annuity in full. Once the initial surrender period ends, you typically wouldn’t have to worry about market value adjustment any longer.
For example, say that you decide to surrender your annuity during a period when interest rates are higher than they were when you purchased the contract. In that scenario, the annuity company would have to pay out the money in the annuity at the higher rate to you, meaning a loss for the company. To offset the loss, it could impose a negative market value adjustment against the total withdrawal value.
On the other hand, say that rates are lower at the time you surrender the annuity than when you bought it. Then the insurance company could apply a positive MVA to make up the difference so you get a better rate of return.
MVAs provide the insurance company with loss protection. At the same time, you stand to benefit if you end up with a positive market value adjustment against your annuity’s value if you cash out when interest rates are down.
Other Early Withdrawal and Surrender Rules
While market value adjustment can work in your favor when rates are low, keep in mind that there may be other financial consequences for early withdrawal or surrender. For example, you may have to pay a 10% early withdrawal tax penalty if you’re taking money from an annuity before age 59 1/2. The amounts withdrawn may also be subject to ordinary income tax, which could end up making an early withdrawal costly.
Surrendering an annuity is something you might consider if you no longer need it but that can come with a penalty of its own. Additionally, you may still be hit with the 10% early withdrawal penalty, plus you’ll have to pay income tax on the annuity withdrawal. That makes these options less appealing for accessing cash.
If you’re considering an annuity surrender simply because you don’t like the terms of the annuity, there may be a better option. You may be able to execute a 1035 exchange, in which you swap out one annuity contract for a new one. This can have tax implications of its own, however, so you may want to talk to a tax pro or financial advisor before making a move.
The Bottom Line
Market value adjustment is a tool insurance companies and annuity issuers use to manage risk. A market value adjustment can work in your favor if you decide to surrender your annuity when interest rates are low. Before withdrawing money from an annuity or surrendering it, be sure to read the terms of your contract to understand whether an MVA or other penalties fees will kick in. Also, keep an eye on interest rate movements since the timing matters for market value adjustments.
Retirement Income Tips
- Consider talking to a financial advisor if you have an annuity that you’re no longer sure you need. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
- Fixed annuities can provide reliable income for retirement, but they’re more conservative in terms of risk and returns compared to other annuity options. A variable annuity, for example, could – potentially – offer a better return. If you’re interested in utilizing annuities in your retirement planning strategy, get to know how different annuity options work and their pros and cons.
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