Annuities are intended to be long-term investments, and the rules regarding withdrawals differ by annuity type. In an immediate annuity, payments begin shortly after the initial investment is made. In a deferred annuity, making early withdrawals before retirement age can result in taxes and penalties.
Immediate annuities are also commonly referred to as income or payout annuities. They tend to be popular with individuals who have reached retirement age. With an immediate annuity, the investor hands over a lump sum of cash in exchange for regular income payments. These payments can be made over a set number of years, or they can continue as long as the investor and spouse are alive. Since this type of annuity is set up to receive immediate payments, early withdrawal penalties don't apply.
Deferred annuities are set up for payments to begin after the investor reaches 59 1/2 years of age. If the investor makes an early withdrawal, the funds are subject to a 10 percent federal income tax penalty on accumulated earnings, in addition to regular income tax charges. And if the withdrawals are made during the initial minimum investment period -- typically five to seven years -- a surrender charge will apply. Surrender charges can range anywhere between 7 and 20 percent of the withdrawal amount.
Annuities offer investors four different options for receiving payments. If the investor receives a guaranteed income for a specified period, payments will continue for a set period, such as five or 30 years. Under this payment plan, if the investor dies before the guaranteed period is up, the designated beneficiary receives the rest of the payments. With guaranteed payments for life, payments cease with the death of the investor and survivor benefits don't apply. A combination option allows the investor to receive guaranteed payments for life, while allowing limited survivor benefits if the primary investor dies within a certain period. For example, in a policy called "life with a 10-year period certain," if the primary investor dies five years into the policy, the beneficiary receives five years of payments. A common option for married couples is a joint and survivor annuity, where payments continue for the life of each spouse.
The Living-Benefit Option
The living-benefit option is a voluntary feature that can be purchased for an additional fee. Under the guaranteed minimum accumulation benefit, withdrawals aren't permitted during the initial minimum investment period, but the investment won't fall below the principal investment amount regardless of how the market performs. Under the guaranteed minimum withdrawal benefit, the payout is guaranteed to be at least the amount of the principal investment and can be passed on to beneficiaries. With the guaranteed minimum income benefit, the investor is guaranteed a certain rate of return on the principal investment.