When Does an Immediate Annuity Begin Making Payments?

An immediate annuity (also known as a single-premium immediate annuity or SPIA) is an insurance contract where an individual pays a lump sum to an insurer, and in return, begins receiving regular income payments almost immediately, typically within 30 days to a year. This structure contrasts with deferred annuities, which accumulate interest over a period before payouts start. Immediate annuities are popular among retirees or those looking for consistent income during their retirement years.

The payments from an immediate annuity typically start within one year after the initial investment. Most people choose to begin receiving payments within 30 days to cover immediate expenses in retirement. However, annuity holders can delay the first payment for up to 12 months in some cases, depending on the insurer’s policies and their financial needs.

Payment Frequency Options

Immediate annuities allow flexibility in payment schedules to suit various financial goals. Common options include:

• Monthly Payments: The most common choice for retirees needing regular income.
• Quarterly or Semi-Annual Payments: Suitable for those who prefer less frequent income but want it distributed at set intervals.
• Annual Payments: Offers a single, larger payout once per year, which may be advantageous for individuals with predictable annual expenses.

Immediate annuities are available in different types, allowing flexibility based on individual risk tolerance and desired payment structure.

1. Fixed Immediate Annuities: These offer a guaranteed fixed income amount, which remains consistent throughout the term of the contract. It can be a good choice for individuals seeking predictability.
2. Variable Immediate Annuities: Payments fluctuate based on the performance of investments in chosen subaccounts, allowing for potential growth but also subjecting payments to market volatility.
3. Inflation-Adjusted Immediate Annuities: Also known as inflation-indexed annuities, these provide payments that adjust in line with inflation, preserving purchasing power over time.

An immediate annuity involves two key stages:

1. Lump Sum Payment: The annuity holder provides a one-time lump-sum payment, often using funds from retirement savings accounts like a 401(k) or IRA. The insurance company then invests this sum based on the annuity type selected.
2. Payout Phase: Payments begin within a year of the lump-sum investment. The payment amounts are calculated based on factors like age, life expectancy, payment frequency, and the annuity type. Some annuities provide income for life, while others offer payments for a specific period, such as 10 or 20 years.
   
   Example: If a retiree pays $100,000 into a fixed immediate annuity at age 65, they may receive a fixed monthly payment for the rest of their life. In a variable annuity, payments could increase or decrease based on the performance of the invested assets.

Immediate annuities can offer several advantages, particularly for those in or close to retirement:

• Guaranteed Income Stream: Can provide financial stability by ensuring a regular income, which can be tailored to last for life or a specific period.
• Customizable Payment Options: Allows the choice of payment frequency and duration, adapting to individual financial goals.
• No Market Fluctuations: Fixed annuities offer stability as payments aren’t affected by market performance, giving retirees peace of mind with predictable income.
• Joint and Survivor Options: Joint life annuities allow income continuation for a spouse or beneficiary, helping to ensure support if one annuitant passes away.

While beneficial, immediate annuities may not be suitable for everyone. Consider these potential downsides:

• Reduced Liquidity: The lump-sum payment is locked in, making it inaccessible without penalties. Immediate annuities are not advisable for individuals who need flexible access to their funds.
• No Growth Phase: Unlike deferred annuities, immediate annuities lack an accumulation period, limiting potential growth for individuals seeking capital appreciation.
• Higher Initial Costs: Immediate annuities require a large initial payment, which can be a significant financial commitment.
• Limited Beneficiary Payments: Unless the annuity includes a specific payout provision (e.g., cash refund or joint life option), payments may stop upon the annuitant’s death, leaving no funds for heirs.

Withdrawals from immediate annuities are subject to income tax. The tax treatment depends on whether the annuity is qualified or non-qualified:

• Qualified Annuities: Funded with pre-tax dollars, making all withdrawals taxable.
• Non-Qualified Annuities: Funded with after-tax dollars, where only earnings are taxed upon withdrawal.

Immediate annuities come with various payout options to meet different financial goals and preferences:

• Life-Only Option: Payments continue for the life of the annuitant but cease upon death, providing the highest monthly income.
• Period-Certain Option: Guarantees payments for a set number of years (e.g., 10 or 20 years), continuing to beneficiaries if the annuitant dies early.
• Joint and Survivor Option: Payments continue for the life of a second person, often a spouse, ensuring income for both individuals.
• Inflation-Adjusted Payments: Payments adjust to inflation, providing some protection against the rising cost of living.

Immediate annuities are suited to individuals who:

1. Need reliable income immediately upon or shortly after retiring.
2. Prefer to supplement other retirement income sources, such as Social Security.
3. Seek predictable payments without market volatility affecting their income.
4. Are comfortable with reduced liquidity, having other funds set aside for emergencies.

Consult with a financial advisor to confirm the best approach for your unique situation.

How soon do immediate annuity payments begin?

Payments typically begin within 30 days to one year after the lump sum is invested.

What’s the difference between a fixed and variable immediate annuity?

Fixed annuities offer predictable payments, while variable annuities fluctuate based on investment performance.

Are immediate annuities flexible?

Once purchased, immediate annuities provide fixed terms, making it challenging to withdraw funds early without penalties.

What is a Deferred Annuity? Your Guide

What is a Non-Qualified Annuity?