August 22, 2023

An annuity that provides income immediately upon purchase, as opposed to one that defers payments until some future date.

Immediate annuities can be very attractive to retirees who want to receive regular payments to supplement their other sources of retirement income, but they are also complex financial products with a number of potential drawbacks that must be carefully considered before purchase.

An immediate annuity is not the right choice for everyone. Here is what you need to consider to decide if an immediate annuity is a good fit for your retirement strategy.

How does an Immediate Annuity Work

An immediate annuity is designed to provide you with income payments for a set period of time in exchange for an initial lump-sum investment. They’re called “immediate” annuities because you begin receiving annuity income payments shorty after you deposit your money.

Annuities are a type of contract that provides payments to an individual, typically after retirement. There are immediate and deferred annuities, fixed and variable annuities, and annuities with different features and fees.

You invest an initial sum of money, and the annuity company promises to pay you a regular income for the duration of the contract.

An annuity’s income guarantee makes it an attractive option for some retirement investors, but it has its own costs. There are fees to watch out for, and once you’ve purchased an annuity contract, it can be expensive to withdraw your principal investment.

If you try to withdraw more money than your normal monthly or yearly annuity payment, you could be penalized severely.

This low level of liquidity means it is not advisable to invest all your savings in an immediate annuity contract.

Immediate Annuity Payments

An immediate annuity is a contract that cannot be changed once it is started. This means that you have to be careful when deciding to start one. “Annuitization” or “annuitize” describes this income stream that cannot be changed.

SPIA’s offer the ability to start receiving annuity checks within 30 days, or to defer payment for up to 12 months.

If you want to defer future payments for longer than 12 months, you can purchase a Deferred Income Annuity or a QLAC.

If you’d like a retirement income that will last for the rest of your life with more flexibility and control, consider a Guaranteed Lifetime Withdrawal Benefit. The income rider will provide similar benefits to the SPIA annuity but with better results.

Immediate vs Deferred Annuity

There are two types of annuity contracts: immediate annuities and deferred annuities. each type has its own annuity income payment schedule.

  • With a deferred annuity, you delay income payments for at least a year or longer. This gives the annuity company more time to invest and grow your money, so your future payments will be larger than you would get with the same initial investment in an immediate annuity.
  • With an immediate annuity, the income payments begin within a year of purchasing the contract, and many start right after you sign up. Because there is no delay in collecting income, these products can be a good fit for people who are just entering retirement.

With an immediate annuity, you hand over a sum of money to an insurance company in exchange for fixed monthly payments for the rest of your life.” An immediate annuity is kind of like a do-it-yourself pension plan, according to Jonathan Howard, a CFP with SeaCure Advisors.

With an immediate annuity, you pay a lump sum of money to an insurance company and they give you fixed monthly payments for the rest of your life.

You will not receive your pension from your employer, but rather from a lump sum of money that you have given to an insurance company.

Single Premium Immediate Annuity

An immediate annuity is an annuity that is funded with a single, lump sum deposit.

This particular style of annuity is called a single premium immediate annuity (SPIA) because it is funded with a lump sum. Another style of annuity, deferred annuities, can also be purchased with a lump sum but can also be incrementally funded over the years leading up to retirement.

With immediate annuities, you have to put up the money upfront in order to start collecting income right away.

You can fund your SPIA either by making a large deposit of cash or by transferring money from a retirement plan, such as a 401(k) or individual retirement account (IRA).

If you don’t need income right away, you can choose to put your money into a deferred annuity. Once you’re ready to retire, you can convert the deferred annuity into an immediate annuity, which will give you a steady income.

Types of Immediate Annuities

Variable Immediate Annuities

A variable immediate annuity is an investment account where you deposit a certain amount and what you earn is based on market performance.

In a variable immediate annuity, your investments are held in subaccounts. These subaccounts work like mutual funds, and invest in groups of assets like stocks, bonds, and money market funds.

The amount of money you receive each month from your investments may increase if the investments do well, but may decrease if the investments do poorly. As with regular investment accounts, you may end up losing money if the investments do not perform well, especially in the short term.

A variable annuity can make sense if you are willing to accept some fluctuations in your income payouts in exchange for the potential for higher growth in the long term.

A variable annuity contract could be a good option to consider if you are looking for inflation protection. Market returns have historically been much higher than inflation rates and returns of other safer investment options like CDs and annuities with fixed rates of return.

Make sure you have enough money to cover your bills in case your income suddenly decreases during a market downturn.

Fixed Immediate Annuities

An annuity that pays you a set income regularly in exchange for an upfront payment works similarly to a CD.

The annuity becomes a much safer investment, as there is no risk involved aside from the risk of not having access to the locked-up money.

If you withdraw more money than is allowed, you may be charged a penalty.

The returns you receive from a fixed immediate annuity will be lower than if you had chosen an annuity whose returns were partially based on market conditions.

If you need a guaranteed income and cannot afford to lose any money, a fixed annuity would be a good option.

Index Immediate Annuities

An index immediate annuity, also known as a fixed index annuity, is a type of annuity that falls in between a variable annuity and a fixed annuity. Your payments with this type of annuity are tied to a market index, such as the S&P 500.

Your payment from the index is based on how well it is doing. If it is doing well, you receive more money. If it is not doing well, you receive less money.

An index annuity limits both your potential profits and losses, so there is less volatility in your income than with a variable annuity.

A fixed index annuity will earn you less money in good years, but more in bad years, as compared to a variable immediate annuity. In addition, your losses are usually limited to the initial amount invested, meaning you won’t lose any of the money you originally used to purchase the annuity.

Term Immediate Annuities

In an immediate annuity, payments only last for a set period of time called a term. Terms generally range from five to 20 years, and you can choose an interval that works for you.

If someone dies during the term of an annuity, the annuity will usually continue making payments to the person’s selected heir. The payments will stop once the term is over, even if the person is still alive.

An immediate annuity can be a good option if you only need income for a set period of time.

According to Greg Klingler, people who purchase a fixed time period immediate annuity typically do so in order to fund a life insurance policy that has a fixed funding arrangement.

Your life insurance policy could be used to pay off your mortgage or to cover your bills until you qualify for other income, like a pension. The logic is you’re covering a temporary need that won’t last your entire life.

Lifetime Immediate Annuities

If you want, you could choose a lifetime immediate annuity instead. This kind of annuity makes payments for as long as you live.

With a joint lifetime annuity, payments continue as long as at least one of the people it is set up for is alive.

With joint lifetime annuities, payments are lower than with comparable single lifetime annuities because the payments are tied to two lifespans, which increases the likelihood that at least one person will live a long time.

A lifetime immediate annuity can be a good way to plan for retirement, whether you are single or have a partner. With this type of annuity, you are guaranteed to have income for as long as you live.

Immediate Annuity Payouts

An income annuity consists of a series of income payouts. Below is a brief description of what to expect from income annuity payouts. For more information, check out our annuitization guide.

Life Income

With an immediate lifetime annuity, you would receive guaranteed income for the rest of your life, but no payments would be made after your death. This option would not be a good choice if you want someone to continue receiving payments after your death.

Joint and Contingent Life Income

If the annuitant dies, income payments to the contingent annuitant will continue for his or her lifetime. The income payments will continue for as long as either the annuitant or the contingent annuitant is alive. If the annuitant dies, the income payments will continue for the lifetime of the contingent annuitant.

If the original annuitant dies, payments will continue at the same rate to the contingent annuitant.

Payments will stop when the annuitant and the person they are contingent on die.

Income for a Fixed Period

As long as the annuitant makes their payments, they are guaranteed to receive them for the number of years and months chosen in their application. If the annuitant dies before the end of the fixed period, their death benefit will be a lump sum equal to the commuted value.

The death benefit recipient may elect to receive the remaining guaranteed annuity payments, as scheduled, instead of the commuted value. An annuity that pays out for a fixed period of time can also be known as an Ordinary Annuity or a Period Certain Annuity.

Life Income with a Guaranteed Period

If you purchase an annuity, you will receive payments for as long as the person who is receiving the annuity lives. If that person dies during the guaranteed payment period, the remaining payments will go to you or your beneficiary.

Life Income with Installment Refund

Your payments will begin at the income start date and will continue throughout the annuitant’s lifetime.

If the person who purchased the annuity dies before receiving payments equal to the original purchase price, the payments will continue to the named primary beneficiary until the sum of all payments equals the original purchase price.

Life Income with a Cash Refund

Your payments will start on the income start date and will continue for the rest of the annuitant’s life.

However, if the annuitant dies before receiving total annuity payments equaling or exceeding the purchase price, the difference will be paid to the named beneficiary in a lump sum.

Inflation Adjusted (Cost of Living Adjustment)

This is an optional feature where you can choose to have a lower income amount to start with, but it will increase annually to keep up with inflation.

Accumulation Period For Immediate Annuities

The shortest amount of time you can have an immediate annuity is 30 days, and the longest you can have a deferred annuity is 12 months.

Deferred annuities offer accumulation periods longer than one year.

A Split Annuity

An annuity that is “split” into two annuities, an immediate annuity (SPIA) and a deferred annuity. The immediate annuity provides income currently, while the deferred annuity provides income in the future.

If you have two annuities, you will receive more money each month than if you just had one.

Immediate Annuity Rates

The rates for income annuities change every week, and a new sample rate is published monthly to give people an idea of how much income they can generate from this type of annuity.

To see current rates from the best insurance companies and to get up-to-date payment estimates, request a quote using the form below.

Immediate Annuity Pros And Cons


  • An SPIA annuity might generate higher income paychecks than a Fixed Indexed Annuity or Variable Annuities with an income rider.
  • The income annuity guarantees regular payments based on contract terms, similar to a pension plan.
  • You can choose how often you collect your steady retirement income on a monthly, quarterly, semi-annually, or annually basis.


  • The income payouts are irrevocable, which means once you turn on the income, there’s no turning it off. There’s no refund.
  • No access to your original principal in case of emergencies. No liquidity.
  • Fixed immediate annuities have no cash value and offer no growth potential. However, one can expect to earn between 1% – 1.5%  interest rate annually.
  • The current interest rate environment makes SPIA rates meager.
About the Author Brian Richards

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