Annuity Payment Options
The amount of income your annuity contract can generate depends on several factors, but the most important is when you begin taking payments. Delaying income to age 70–75 generally results in significantly higher monthly payouts, while starting in your 50s leads to lower income due to the extended payout period.
This timing dynamic is similar to Social Security—the longer you wait, the more income you can receive. However, annuities funded with pre-tax dollars follow IRS rules and require required minimum distributions (RMDs) beginning at age 73 as of 2025.
The insurance company uses actuarial data and life expectancy tables to determine your payout. If you begin income later in life, they expect to pay you for fewer years—so your monthly income is higher. If you start earlier, your payments are spread out over a longer time, which lowers the amount.
Prevailing interest rates at the time you lock in your annuity terms also influence your income. Higher interest rates typically allow insurers to offer larger monthly payments for the same premium. When rates are lower, payout offers are more conservative.
Action: Evaluate whether delaying income until age 65 or older can provide meaningfully higher monthly payouts. Foxcove Financial can help you compare timing strategies based on your retirement goals.
Ways to Access Income from an Annuity
There are four primary options for generating income from an annuity. Each method has different implications for control, guarantees, liquidity, and taxes.
| Income Option | Lifetime Guarantee | Access to Principal | Flexibility | Taxable? |
|---|---|---|---|---|
| Free Withdrawals | No | Yes | High | Taxable if gains are withdrawn. Fully taxable if qualified; partial taxation if non-qualified. |
| Lifetime Income Rider | Yes | Limited | Moderate | Payments are fully taxable if from a qualified annuity. Non-qualified payouts include both taxable earnings and tax-free return of principal. |
| Lump-Sum Payment | No | Yes | High | Gains are taxed as ordinary income. Entire distribution is taxable if from a qualified source. |
| Annuitization | Yes | No | None | Taxation depends on funding source. Qualified annuities are fully taxable; non-qualified annuities use exclusion ratio to split taxable and non-taxable portions. |
Option 1: Free Withdrawals
Free withdrawals allow you to take systematic income without making permanent changes to your contract. Most annuities allow up to 10% of the value to be withdrawn each year without penalty.
This is the most flexible option but lacks any lifetime income guarantee. If the account is depleted, payments stop—there’s no insurance support beyond the account balance.
Option 2: Lifetime Income with a Rider
A lifetime income rider guarantees income for life and allows partial access to your annuity value. This is often added to fixed index annuities and is sometimes built into the contract or available for an annual fee, typically around 0.95%.
You maintain some control over your money, but any withdrawals outside the rider’s terms could reduce the guaranteed amount. Foxcove Financial can help you review contract-specific rider terms and options.
Option 3: Taking a Lump-Sum Payment
After your annuity’s surrender charge period expires, you can withdraw the full account value without penalty. This option gives you complete control but ends all future guaranteed income and subjects the gains to ordinary income tax.
Option 4: Annuitizing Your Contract
Annuitization is a one-time decision that converts your annuity balance into a stream of guaranteed payments for a set period or for life. Once annuitized, you no longer have access to the lump sum.
Payment structures include single life, joint life, or period certain. The straight life option offers the highest payout, but no remaining value passes to beneficiaries if you pass away early.
Why Annuities Offer Lifetime Income Protection
Annuities are the only financial product that can provide guaranteed lifetime income. Whether you choose annuitization or a lifetime income rider, these strategies protect against the risk of outliving your assets.
Many owners prefer riders because they offer income flexibility. You can pause income to make a principal withdrawal, then restart payments at a new (lower) amount based on the updated balance.
How Annuity Payments Are Taxed
Distributions from tax-deferred annuities, including those inside IRAs or qualified plans, are taxed as ordinary income. RMDs are required starting at age 73. For non-qualified annuities, only the earnings portion of each payment is taxable—the rest is return of principal and not taxed.
Withdrawals made by someone other than the named beneficiary may result in penalties or legal consequences. Be sure your ownership and beneficiary designations are up to date.
Choosing the Right Income Option for You
Each annuity income strategy has its strengths. The right choice depends on your goals, timing, and comfort with access or guarantees. Key decision factors include:
- Age when income begins
- Health and life expectancy
- Prevailing interest rates
- Availability of riders or payout options
- Tax treatment of distributions
Foxcove Financial can help you evaluate insured annuity strategies that align with your income goals and retirement horizon.
Looking for Guidance?
If you’re ready to take the next step in planning your retirement with confidence, Foxcove Financial is here to help. We’ll walk you through your options, answer your questions, and help you evaluate solutions that align with your long-term goals. We specialize in insured strategies designed to protect and grow your retirement income. Call us at 609.807.8502 or schedule an appointment.