What is an Immediate Payment Annuity?

An immediate payment annuity is a type of annuity contract that begins to issue payments as soon as the investment is created, using a single payment into the plan. The annuitant continues to receive disbursements or payments from the annuity over a period of time, based on the terms and conditions that relate to the plan. In some cases, the disbursements continue at regular intervals for a specific number of years, or continue until the recipient of the annuity payments passes away.

One of the more common applications of an immediate payment annuity is as a means of creating a steady flow of income over an extended period of time. Retirees who choose to sell a primary residence sometimes use this strategy as a means of limiting their tax obligation while also establishing a series of monthly disbursements that provide a steady flow of cash for living expenses, travel, or other financial needs and wants. Depending on the age that retirement takes place, the annuitant may opt for arranging the payment structure so that monthly disbursements are received over a period of twenty to thirty years, or opt for arranging the payment structure so that fixed payments continue for as long as the retiree lives.

With some versions of the immediate annuity plan, it is often possible to identify a beneficiary who can receive payments after the annuitant passes away. For example, the annuitant may designate a spouse or a child as the beneficiary. Upon confirmation that the annuitant is no longer alive, the payments continue until the remaining funds in the annuity have been exhausted.

There are several ways to fund an immediate payment annuity. While selling property is one possibility, it is not uncommon for individuals to roll the balance of some other type of retirement account into an annuity arrangement. This may be prudent if the terms associated with the retirement plan are not as desirable as those associated with the annuity plan. At times, doing so may also make it easier to control tax liability more efficiently.

An immediate payment annuity is often a viable option for funding the retirement years. While the strategy does work well in many instances, seeking advice from a financial planner before creating this type of financial nest egg is a good idea. The planner can assess the financial situation of the client, and determine if the immediate payment annuity is in the best interests of that client. If not, the planner can suggest alternative strategies that are more suited for the client’s individual needs.