What is an Income Annuity?

Sometimes referred to as an immediate annuity, an income annuity is a type of annuity payment that provides an annual income to the owner of the annuity pension or similar plan. In most cases, the annual income is divided into monthly installment payments, providing the recipient with a steady income throughout the twelve-month period. A number of factors influence the amount of the income annuity, including the age of the recipient at the time the payments commence and whether the payments are structured to continue for a specific period of time or continue up to the plan holder’s death.

One common example of how an income annuity works is associated with an employee sponsored retirement plan. With this type of retirement plan, the recipient may choose to begin payments at a particular age. Many plans offer the option of beginning to receive annuity payments at age 62 or even sooner, depending on the laws and regulations regarding the structure of these types of plans. Just about all plans allow for payments to begin when the retiree reaches the age of 65.

The nature of the underlying annuity will have some impact on the amount of the annual annuity payment. This is because an income annuity may be structured as a fixed or a variable annuity. With a fixed approach, the payments remain the same from one year to the next. The variable annuity may result in a different income each year, based on the performance of the securities that provide the support for the income annuity plan. More conservative investors are likely to go with the fixed approach, while those who are willing to accept the risk in return for the possibility of higher returns may find the variable annuity more to their liking.

Different types of retirement plans also allow recipients to determine if the income annuity should be received for a specific number of years, or continue until the recipient passes away. For example, someone who retires at sixty-five may choose to go with a period certain of twenty years, meaning that the disbursements are calculated to essentially exhaust the annuity by the time the recipient is eighty-five year of age. If the recipient expects to live beyond that age, he or she may prefer to structure the payments to continue up to the point of death. Depending on the provisions of the plan, any remaining balance may be disbursed to a beneficiary once the recipient has passed away.