What is a Lottery Annuity?
In an annuity, a beneficiary receives an annual payment. In a lottery annuity, a lottery winner chooses to accept payments over a certain number of years versus a lump sum payout. The prize value is generally more than the lump sum option.
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Explanation
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The annuity allows the winner to receive regular monthly or yearly payments until the total amount of the prize has been distributed.
Interest and Taxes
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The winner does not get paid interest on the winnings held in an annuity. Income taxes are payable against the winnings at the time of distribution.
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Annuity Investment Firm
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If a winner chooses the annuity option and decides later to have the rest of the funds dispersed as a lump sum, he will need to retain the advice of an annuity investment firm. Annuity payments are generally ineligible for conversion to lump sum payouts through the state lottery program.
Inflation
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Lottery annuity payments take into account inflation. This explains the reduction of winnings if winners choose the lump sum option. For example: a $500,000 jackpot paid as an annuity will take into account a rate of inflation (4.5 percent for this illustration). The winner will be paid a total of $500,000 over time. This same jackpot, adjusting for inflation, will only be worth $207,321.43 in today's dollars because the rate of inflation must be deducted.
How Investment Firms Work
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Annuity investment firms will purchase your lottery annuity for a cash value in today's dollars, adjusting for inflation. This means that a $500,000 jackpot will be purchased for $207,321.43, less fees and other administration costs.
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