Annuity payouts: how your options work

There are many ways to get money out of an annuity, from monthly income payments for life to a simple lump sum. Whether you’re trying to decide the best way to handle an existing annuity or shopping for the best product for you, here’s what you need to know.

What is an annuity?

Annuities are a type of insurance contract that can often work like a retirement account or pension in some respects. They can help you save for retirement and ensure steady income for a predetermined amount of time, often for life. If you’re trying to understand an annuity that you currently have, the best path is to speak with your financial professional or an agent. If you’re shopping for a new annuity, be sure to ask specific questions—like how your payments will work—to ensure that the annuity meets your time frame and needs. There are a few different types of annuities, and they have many options. The most common are immediate and deferred annuities (see below).

How do immediate annuities work?

With an immediate annuity, you pay a lump-sum premium and start receiving predetermined regular payments right away. Immediate annuities are usually funded with savings from retirement vehicles, like a 401(k), or bank accounts. There are different payout options, but most people choose lifetime income. It’s important to note that immediate annuities offer little or no liquidity. Instead, you gain peace of mind in knowing that you have a stream of steady, guaranteed income.¹

How do deferred annuities work?

With a deferred annuity, you can make a series of premium payments or make a lump-sum premium payment. Any growth during what is called the accumulation phase is tax deferred. Unlike an income annuity (which only provides an income stream), a deferred annuity can offer both a period of tax-deferred accumulation and the potential to receive income payments later. Then, at a future date, usually after age 59½, deferred annuities offer the opportunity for you to receive income payments. That’s called the annuitization phase.

Within the category of deferred annuities, there is also a specific product called a deferred income annuity (DIA). With a DIA, you do not begin receiving income right away; the income stream starts after a defined deferral period at a future date, and it does not provide a typical accumulation period you can tap into beforehand. Withdrawals may be subject to regular income tax and, if made prior to age 59½, may be subject to a 10% IRS penalty. In addition, surrender charges may apply to withdrawals made in the first several years you own the policy.

Fixed deferred vs. variable deferred annuities

When you purchase a deferred annuity, you can choose between two types of growth potential. A fixed deferred annuity offers guaranteed interest at a specified ate for a period of years that is set when you purchase it. After that initial guaranteed rate period, the interest rate will be at least equal to a guaranteed minimum amount specified in the policy. A variable annuity² offers the opportunity to grow in the market via investments you decide upon. This means that your money is subject to market volatility, and you can even lose money, as with all investments. Both fixed and variable deferred annuities have advantages and disadvantages, and which one you choose may depend on your objectives, time horizon, and risk tolerance.

Understanding annuity income payout options

The way you receive annuity payouts will depend on the product and the options you select when the annuity is purchased. Some annuities may offer only one type of payout. When you begin annuity payouts will matter as well. Your monthly, quarterly or or yearly payout will be lower, for example, if you begin payouts when you’re 62, then it will be if you wait until you’re 70. The payout rate also depends on other factors, including your gender and on the prevailing interest rate environment at the time of annuitization. You don’t need to choose your payout option at the time of purchase with a fixed deferred annuity or a variable annuity.

How much do annuities pay out?

That depends on many factors. The most important factor is how much money is in the annuity. A $10,000 immediate annuity will have a much lower payout than a $1 million immediate annuity. Other factors, like age and gender, and the prevailing rate environment at the time of purchase could also increase or decrease the amount of your annuity payout.

How do annuities pay out?

Not every annuity will have all of these options. Many may have only one or two. Be sure to check that the annuity payout options you want are included in the products you’re considering. That said, here are the different ways you can get money out of various annuities:

Fixed period/period certain: You choose a specific term, like 20 years, for your payout period. The amount you’ve funded in the annuity will inform how much you receive during those years. This option does not provide lifetime income.

Income for life: You receive payments for as long as you live. Converting some of your retirement funds into a lifetime income stream is a great way to guarantee that you will never outlive your retirement savings.

Life income with period certain: This combination annuity guarantees payments for the annuitant (the personal who receives annuity payments) for their lifetime, and it also guarantees payments for a certain number of years. If the annuitant passes away before those years elapse, the payments go to a beneficiary.

Joint or survivor life: This type of annuity has two annuitants on one policy. If one passes away, income payments continue for the lifetime of the second annuitant.

Cash refund: Often chosen with a single premium immediate annuity (SPIA), this payout option ensures that if the annuitant passes away before receiving a total amount equal to the original premium, the remaining difference is paid out in a lump sum to a beneficiary. This provides peace of mind that at least the full premium amount will be returned to you or your beneficiaries.

Lump sum: Some annuities give you the option to receive a lump sum equal to the present value of all future income payments. This is generally advised against, however. Annuity payments count as income if the annuity was purchased with pretax dollars, and taking a lump sum may cause you to pay significantly more taxes. (If the annuity was purchased with after-tax dollars, you will owe taxes on the annuity’s growth, but not on your contributions.) This option is not the same as “cashing out” as income annuities do not have cash value like life insurance policies. This refers to the “100% cash withdrawal option, which provides the present value of future income payments.

Pros and cons of annuities

Annuities can be a smart choice if you’re worried that you might run out of retirement funds or if you’re unsure how to budget your savings. But they may not be right for everyone. Here are some things to keep in mind when considering an annuity:

Benefits:

• Can provide reliable lifetime income.
• Helps with budgeting retirement spending.
• Offers customizable coverage and options.
• Offers tax-deferred growth.
• May include a death benefit.

Drawbacks:

• Fees on deferred annuities, particularly variable annuities, may be higher than with some other retirement savings products.
• There are surrender charges and tax penalties for early withdrawals.
• Some contracts are irrevocable and have no surrender value.

Are annuity payouts taxable?

Yes, annuity payouts are generally taxable. The portion of the payout that represents earnings is subject to ordinary income tax. However, the portion that represents a return of your principal is not taxed. For detailed guidance, consult with a tax professional or financial professional to understand your specific situation.

Is an annuity right for me?

Annuities are one of many options to help you plan for your retirement. An annuity can be a good retirement savings vehicle and can make sense in many situations. In other situations, different options may be more beneficial. If you’d like to speak to a professional, our agents and NYLIFE Securities registered representatives can help you look at your total retirement picture and create a strategy to get you where you want to go.

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¹All guarantees are backed by the claims-paying ability of the issuer.
²Variable annuities are sold through NYLIFE Securities LLC (Member FINRA /SIPC), a Licensed Insurance Agency and a New York Life Company.