About Immediate Annuity Planning
An immediate annuity, sometimes called a single-premium immediate annuity, is a retirement income product sold by insurance companies. A person (annuitant) purchases an annuity by making a single deposit (premium) with an insurer. In return, the annuitant receives a guaranteed, stable stream of income for life. As the term "immediate" implies, payments under an annuity begin immediately after payment of the premium, typically 30 days later. Annuities are contractual agreements and the decision to purchase one is irrevocable. In other words, you cannot choose later to transfer the money to some other type of investment. There are advantages to an immediate annuity and for many people annuities often have a place in retirement planning.
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Features
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Immediate annuities are often "life-only," meaning that once the annuitant dies the payouts cease. Other options are available, however, such as guaranteed terms where the payments are guaranteed for periods of 10, 15, or 20 years, for example. If the annuitant dies before expiration of the stated term, payments continue to a designated beneficiary for the remainder of the term. Also, for couples, annuities with a survivor option exist where the surviving spouse continues to receive full payments or a fraction thereof, for the remainder of his or her life. If these type options are selected, the monthly payments to the annuitant are less than would be the case if only a single life annuity was purchased.
Funding
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Immediate annuities are funded by a portion of one's total retirement assets and may come from a lump-sum distribution from another retirement investment or from personal savings. Annuities are characterized for tax purposes by the source of income used to pay the premium. If funds come from tax-deferred sources like IRAs, company-sponsored retirement plans, deferred compensation plans, and the like, they are considered qualified. All payments to the annuitant represent taxable income. If funds come from money that has already been taxed, they are considered non-qualified. Portions of the payments are considered a return of capital and only the earnings are taxable income.
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Advantages
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Advantages of an immediate annuity can be summed up as security, simplicity, and safety. Annuities provide security in the form of guaranteed monthly payments for life. They are simple in that the annuitant is freed from the burden of managing withdrawals from other retirement investments. They are safe because the income stream generated from an annuity is secured by the assets of the insurance company who bears all of the investment risks.
Disadvantages
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Disadvantages include the irrevocable nature and the fact that annuities generally provide lower returns than might be achieved through other long-term investments.
Considerations
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Payments from annuities before age 59-1/2 may be subject to a 10 percent IRS penalty, so annuities are designed for people in retirement. Annuities are only for those in good health who expect to live well into their eighties and beyond, or for those who wish to include them in estate planning.
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