If you’re including an annuity in your retirement income plan, there’s an important concept you’ll want to understand: market value adjustment (MVA). An MVA may impact your annuity contract if you decide to withdraw funds or surrender the annuity before the contract term ends. This adjustment can apply to various types of annuities, and may affect your payout if you need to access funds before the regular distribution phase begins. Since MVAs can be complex, consulting a financial advisor may be beneficial to help you understand the market value adjustment meaning and how it could influence your individual situation.
What Is a Market Value Adjustment (MVA)?
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 a 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.
How a Market Value Adjustment 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.
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.
How to Calculate the Market Value Adjustment

Each insurer has its own approach to calculating the MVA, but it’s useful to understand the general process. Knowing the MVA calculation can help you grasp the details if it ever applies to your annuity. Always review your annuity contract carefully to understand how it might be calculated specifically for you.
For example, if your annuity contract allows a penalty-free withdrawal of up to 10% annually, but you decide to withdraw 20%, the insurer might apply an MVA to the additional 10% you withdrew. Similarly, an MVA could apply if you surrender your annuity entirely within the penalty period. Once this initial surrender period ends, MVAs typically no longer apply.
If you decide to surrender your annuity during a period when interest rates are higher than at the time of purchase, the insurer faces a loss. This is because they would need to pay out at the now higher rates, which reduces their profit margin. To offset this loss, the insurer might impose a negative MVA on your withdrawal amount.
The MVA calculation generally involves the following formula:
- Add one to the purchase index (interest rate at the time of purchase).
- Divide this by one plus the current index (interest rate at the time of withdrawal).
- Subtract one from the result.
For instance, if the purchase index was 2% and the current index at withdrawal is 4%, the calculation would yield a negative 1.9%. This amount would be applied at withdrawal in addition to any surrender fees.
Conversely, if interest rates are lower at the time you surrender than when you bought the annuity, the insurer might apply a positive MVA to compensate you with a better rate of return. This would be calculated using the same formula described above.
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.
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 penalty 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, or need help understand the meaning of a market value adjustment. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area. You can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can 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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