What Is the Lotto Annuity?
An annuity is a series of payments given to you over a period of time, often annually or monthly. An annuity is triggered when a lump sum is placed in an annuity contract, either through an insurance company or a private organization. If you win the Lotto, or other state lottery, you may opt to have your winnings paid over time in a Lotto annuity.
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Options
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When you win a large Lotto jackpot, you will have two options on how to claim your money. The first option is to take your winnings as a lump-sum payment. The second option--the Lotto annuity--is to take your winnings over a 20-, 25- or 30-year period.
Function
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The Lotto annuity pays you a monthly income over the time frame selected. This income is based on the amount of the annuity winnings plus an annual interest rate that should be just enough to account for inflation, usually around 2 to 4 percent. The Lotto will tell you what your income is per month and disclose the annual rate of return on the money placed in the annuity.
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Benefits
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There are two major benefits to taking an annuity rather than a lump sum payment if you win the Lotto. The first is that you stretch the taxes on the winnings over the course of the annuity. Instead of losing a large chunk immediately upon taking the lump sum, you only add the amount of the annual annuity income to your tax return as part of ordinary income. The second benefit is that it helps people budget the money and maintain the assets longer. Many Lotto winners frivolously spend money and end up depleting the entire winnings, leaving themselves back at square one within a few years.
Disadvantages
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Advocates for taking a lump sum distribution claim that Lotto winners are better off taking the lump sum, paying the taxes and investing the money on their own. The Lotto, as an organization, is getting more in interest and earnings on your winnings over the course of the annuity than they are paying you; therefore, it is reasonable to expect that you can do better even with conservative investments over time.
Misconceptions
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While you are unable to change your mind if you choose the annuity option, it is a common misconception that you no longer are able to get a payoff on the annuity. If you wanted to get a lump sum out of the asset, you would need to sell the annuity on the secondary market. For those who need access to large amounts of money--for example, to buy a home--they might have to accept as low as a third of the full amount to sell the annuity to a third party.
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References
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