Do Annuities Mature? And How Payout Options Work

Annuities do not have a “maturity date” in the same way a bond does. Instead, they transition through distinct phases, moving from a period of savings and growth to a phase where payments are distributed. This structure provides a framework for individuals to manage their financial resources, particularly for retirement income. Understanding these phases and payout options is important for anyone considering an annuity.

Annuity Accumulation and Payout Phases

An annuity’s journey involves two stages: the accumulation phase and the payout phase. The accumulation phase is the period when funds are contributed to the annuity contract. During this time, the money grows on a tax-deferred basis, meaning earnings are not taxed until withdrawn. This allows the funds to grow over time due to compounding.

Once the accumulation phase concludes, the annuity enters the payout, or annuitization, phase. This is when the annuity begins making payments to the annuitant. The transition to this payout phase is flexible, allowing the annuitant to choose when to start receiving income. The duration and frequency of these payments can vary depending on the contract and the annuitant’s choices.

Annuitization and Payout Options

Annuitization is the process of converting the accumulated value of an annuity into a steady stream of periodic income payments. This conversion is a significant decision, as it makes the annuity illiquid, meaning the original cash value is no longer directly accessible. The amount of income received is influenced by factors such as the annuitant’s age, life expectancy, and prevailing interest rates at the time of annuitization.

Several common payout options are available, each designed to meet different financial needs and risk tolerances. A life annuity, also known as a straight life or pure annuity, provides payments for the annuitant’s entire life, stopping upon their death. This option offers the highest periodic payment because there is no guarantee of payments continuing to beneficiaries. A life annuity with period certain guarantees payments for the annuitant’s life, but also for a specified minimum period (e.g., 10 or 20 years). If the annuitant dies before the guaranteed period ends, beneficiaries receive the remaining payments.

A joint and survivor annuity is designed to provide income for two lives. Payments continue for as long as either annuitant is alive, often with a reduced payment amount to the surviving individual after the first annuitant’s death, such as 50% or 75% of the original payment. A fixed period annuity, or period certain annuity, pays out for a specific number of years, regardless of life expectancy. If the annuitant dies before the term ends, payments continue to a designated beneficiary.

Some annuities offer the option to receive the entire accumulated value as a lump sum payment. While this provides immediate access to funds, it may lead to significant tax implications, especially if the annuity was funded with pre-tax dollars, as the entire amount could be subject to income tax in the year of withdrawal. Each payout choice carries unique implications for financial security and tax obligations, making careful consideration of individual circumstances essential.

Fixed-Term Annuities

While most annuities focus on providing income for life or an indefinite period, a specific type known as a fixed-term annuity (or period certain annuity) has a defined end date. This annuity pays out for a specific, predetermined number of years. Once this term concludes, payments cease, and the contract ends.

Fixed-term annuities can bridge income gaps, such as the period before Social Security benefits begin. Unlike other annuities that aim to provide income for an entire lifetime, this type offers guaranteed payments for a set duration. At the end of the term, the annuitant may receive a lump sum. This characteristic makes the fixed-term annuity the closest an annuity comes to a traditional “maturity” concept.