Annuities may play a key role in providing income during retirement. You may want to consider an annuity if you are investing for the long term, since contributions and any earnings accumulate on a tax-deferred basis. Taxes will be due upon distribution, and any distributions prior to age 59-1/2 may be subject to an additional 10% federal tax penalty. Annuities may also help meet the need for immediate, consistent income.
Annuities, issued by insurance companies, can be divided into immediate and deferred annuities, as well as fixed or variable.
Immediate annuity
Immediate annuities provide an income stream in exchange for a premium. Payments are generally made over the Annuitant's life expectancy or for a term of years. Other payment options are also available. Payment amounts may be fixed or variable, depending on the type of contract.
Deferred annuity
A deferred annuity consists of an accumulation phase and a payout phase.
During the
accumulation
phase, the amount contributed to the annuity may accumulate
at a
fixed
rate as determined by the contract provisions, or on a
variable
basis, as
determined by the performance of the underlying sub-accounts.
In a
fixed annuity
, interest is credited and compounded daily. The insurance company guarantees a minimum interest rate; this guarantee is backed by the company's ability to meet its financial obligations.
In a
variable annuity
, the premium is invested in variable sub-accounts, each with its own investment objective. The value of these sub-accounts will vary, possibly with extreme volatility. Variable annuities are offered by prospectus — refer to the prospectus for more information on risks, fees and expenses associated with the annuity.
Annuitization is one form of
payout
from an annuity. During annuitization, the account value of the annuity is converted to an income stream, and can be paid out in fixed amounts as determined by the contract, or on a variable basis, where payments fluctuate with the value of the underlying investments.
Consult a financial advisor for more information and to determine if annuities should be part of your retirement plan.
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