What Is an Immediate Annuity?

An immediate annuity is a financial product that offers an investor payments almost immediately, often within a year, in exchange for their lump-sum payment to an insurance company. While annuities in general are a popular option among retirees, immediate annuities in particular may appeal for their reliability, alongside the other perks they can provide. However, they also have downsides worth weighing, such as the fact you typically can’t access your original investment after purchasing an immediate annuity. Before adding an immediate annuity to your retirement income lineup, it’s important to understand how they work and what their pros and cons are.

Consider working with a financial advisor to get all of your questions answered regarding your retirement plan, including about annuities.

What Is an Immediate Annuity?

Also known as an income or payout annuity, an immediate annuity is a type of annuity that provides investors with income almost immediately after they make a one-time investment. This is in contrast to deferred annuities, which allow investments to grow tax-deferred before providing investors with payments at some point in the future.

Like with other types of annuities, an immediate annuity allows an investor to receive regular payments for a fixed period of time or for life after entering into a contract with an insurance company. ,. Payments can be distributed on a monthly, quarterly or annual basis, depending on the type of immediate annuity. It’s also possible to receive a single, lump-sum payment.

The amount of income you receive from an immediate annuity depends on factors such as your age, gender and the length of your payment period. Interest rates affect the size of payments, too. You can expect to receive a bigger payment if you’re older and interest rates are high.

Types of Immediate Annuities

There are two main types of immediate annuities: fixed and variable. Fixed annuities provide a specific amount of guaranteed income throughout the term of your contract. With variable annuities, payouts fluctuate based on the performance of the investments tied to the annuity.

Beyond that, there are also joint life annuities for partners who want their surviving spouses to continue to receive payments after their deaths. Other options are qualified annuities and non-qualified annuities. Qualified immediate annuities are used in conjunction with tax-advantaged retirement accounts, like IRAs. Non-qualified annuities, however, are not used with these accounts, as the IRS does not classify these contracts as tax-advantaged retirement accounts.

Once you’ve selected the type of immediate annuity that you want, you’ll need to decide how long you want to receive payouts. You can receive payments from your insurance company for the rest of your life. Or, you can receive payments for a certain amount of time, such as a 10- or 20-year period.

Benefits of Investing in an Immediate Annuity

Some of the most notable benefits of immediate annuities include:

Prompt, reliable income: An immediate annuity begins paying out income soon after you purchase it, usually within a year. This can make it appealing for retirees who want a dependable stream of payments to cover daily living expenses. Once the contract starts, the insurer handles the payouts, removing the need to manage withdrawals or monitor markets. This structure can simplify budgeting for older adults who prefer predictable income over managing investments.
Potentially higher returns than traditional savings accounts: Because immediate annuities convert a lump sum into regular payments, they can provide higher guaranteed returns than many traditional savings options, such as certificates of deposit (CDs) or money market accounts. For retirees who value stability more than growth, that steady payout can offer peace of mind. The fixed income ensures you can plan for consistent cash flow without worrying about short-term market swings.
Longevity protection: A lifetime immediate annuity continues payments for as long as you live, reducing the risk of outliving your savings. Even if you choose a set payout term, such as 10 or 20 years, you’ll have a guaranteed source of income for that period. This makes immediate annuities especially useful for retirees who want to cover essential expenses like housing, insurance or utilities.
Possibility of inflation protection: Some versions of immediate annuities also offer inflation protection. Variable or inflation-indexed annuities adjust payments based on investment performance or inflation rates, helping maintain purchasing power as costs rise. This can be a valuable feature for retirees on a fixed income, especially during periods of high inflation.
Favorable tax treatment: You don’t pay taxes on your original investment, only on the earnings portion of each payment. This spreads out your tax liability over time and can make retirement income more manageable from a tax standpoint.

Drawbacks of Investing in an Immediate Annuity

A woman helping her mother research immediate annuities.

At the same time, there are downsides to immediate annuities that are important to take into consideration before getting one. These include:

Limited liquidity: The biggest limitation of an immediate annuity is that it’s permanent. Once you buy one, you typically can’t access your original investment. This lack of liquidity can cause problems if you need funds for an emergency, large purchase or medical expense. Retirees who may need flexibility should carefully consider how much to allocate to an annuity before committing.
Payments end upon death: Another concern is that payments stop when you die, unless you’ve purchased certain options like a joint-life or period-certain rider. This means there may be nothing left for your heirs. For retirees who want to leave assets to family members or charities, this feature can make immediate annuities less appealing.
Potential reduction in real value due to inflation: Inflation can reduce the real value of fixed annuity payments. If prices rise over time, a fixed payment that seemed comfortable at first may cover less in the future. Variable or inflation-adjusted annuities can address this issue, but they often come with higher costs and greater risk.
Investment risk with some immediate annuity types: Variable annuities, while potentially offering inflation protection, also introduce investment risk. Poor market performance can lead to lower payments, which may be difficult for retirees who are relying on annuity income to cover essential expenses.
Fees and other costs: Finally, fees and commissions can vary widely among annuity providers. Surrender charges, administrative costs and optional features may reduce overall returns. Before purchasing an immediate annuity, retirees should review the contract terms carefully and consult a financial professional to confirm that the product fits their broader income and liquidity needs.

Bottom Line

A man considering if he should purchase an immediate annuity.

It’s important to think carefully before buying an immediate annuity. Once you make your initial investment, you won’t be able to get your money back. Weighing the pros and cons can help you decide whether purchasing an annuity makes sense as part of your overall retirement plan.

Tips for Retirement Planning

Working with a financial advisor can increase your opportunities to plan accordingly. They can give you insight that you’re not aware of and make it specific to your situation so that you hit your retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When looking at how much you need to save for retirement, consider a retirement calculator.