An immediate annuity offers you the option to begin receiving payments right away. Instead of an accumulation period that eventually results in payments, you purchase the annuity with a lump sum that pays out immediately. Immediate annuities are a solid way to supplement your income post-retirement with a guaranteed set of payments.
- Written by Christian Simmons
Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.Read More
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- Financially Reviewed ByEbony J. Howard, CPA
Ebony J. Howard, CPA
Credentialed Tax Expert at Intuit
Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation. She specializes in analyzing financial information in the health care, banking and real estate sectors.Read More
- Published: May 27, 2020
- Updated: June 22, 2023
- 6 min read time
- This page features 2 Cited Research Articles
- Edited By
What Is an Immediate Annuity?
With an immediate annuity, you can receive payments right away. According to the Insurance Information Institute, payments can begin as soon as a month after the annuity is purchased. In other types of annuities, such as deferred annuities or fixed annuities, you typically pay into it over a significant period of time and, eventually, they can result in payments.
Since immediate annuities pay out right away, they can help new or soon-to-be retirees supplement their income with a guaranteed stream of payments. Immediate annuities offer financial security without the risk of running out of or losing money.
How Does an Immediate Annuity Work?
When purchasing an immediate annuity, there typically isn’t an accumulation period. Instead, you convert a lump sum of money that you already have into an immediate annuity. This means, to purchase this type of annuity, you must already have a significant amount of cash available.
But it’s important to remember that you should not convert all your liquid cash into an immediate annuity. Once you purchase the annuity and start receiving payments, it can be costly or even impossible to take out money that you put in if you have a large or unexpected expense.
Qualified vs Non-Qualified Immediate Annuities
Whether your immediate annuity is qualified or non-qualified depends on the status of the money that you are converting into an annuity. A qualified immediate annuity is one that you have purchased but have not yet paid taxes on. Therefore, taxes may be taken out of your annuity payments as you receive them.
Your annuity is non-qualified if you have already paid taxes on the lump sum of money. Your payments may not be taxed in this type of immediate annuity.
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Immediate Annuity Payout Options
Like other types of annuities, an immediate annuity can pay out in several different forms depending on your personal situation and needs.
Customizing Your Payout Options
If you opt for the single life option, then you will continue to receive payments off the lump sum of your annuity throughout your life. The payments will stop when you die.
In a joint life annuity, the payments can be tied to both you and a spouse, or some other beneficiary. In this type, the payments can continue to your beneficiary even after you die. The trade-off is that your monthly payouts may be smaller since they are expected to last over a longer period.
A life- and period-certain annuity will pay out over a set period of time. So, unlike other types that would continue payments until you die, this type would only pay out over a certain number of years.
Pros and Cons of Immediate Annuities
Annuities work in many ways so the best type depends on your needs. There are both benefits and downsides to an immediate annuity, so it’s important to determine if it’s right for you.
Pros of Immediate Annuities
- Immediate payouts: You will begin receiving payments almost immediately after you have purchased the annuity instead of having to wait or build up through an accumulation period.
- Reliable and straightforward: While some annuities can be complex and difficult to navigate, immediate annuities are rather simple. You purchase the annuity with a lump sum and then begin receiving payments
Cons of Immediate Annuities
- You must have all the money upfront: Unlike other types of annuities where you can deposit money over time, an immediate annuity requires all of the money upfront. This makes it only a viable option if you have a significant sum of money that you are ready to contribute.
- You can’t access the money later: Once you have purchased the annuity, you are set to receive your stream of payments. It can be costly or even impossible to attempt to withdraw any of your lump sum later. This can cause issues if you have an unexpected major expense or no longer want the annuity.
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Frequently Asked Questions About Immediate Annuities
2 Cited Research Articles
- Rodek, D. (2021, January 6). What Is an Immediate Annuity? Retrieved from https://www.forbes.com/advisor/retirement/immediate-annuity/
- Insurance Information Institute. (n.d.). What are deferred and immediate annuities? Retrieved from https://www.iii.org/article/what-are-deferred-and-immediate-annuities
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