Getting annuity payments starts with choosing how you want your money paid out, then contacting your insurance company to activate one of several payment options built into your contract. Whether you already own an annuity or you’re buying one specifically for income, the process involves selecting a payout structure, completing paperwork with your insurer, and deciding when payments should begin. Payments can start as soon as a month after you set things up, and they can arrive monthly, quarterly, semi-annually, or annually.
Three Ways to Turn an Annuity Into Income
Annuity contracts generally offer three distinct paths to getting regular payments: annuitization, systematic withdrawals, and income riders. Each works differently, and the one you choose affects how much you receive, how long payments last, and whether you can change your mind later.
Annuitization converts your annuity balance into a guaranteed stream of payments from the insurance company. Once you annuitize, the decision is permanent. You give up access to your lump sum in exchange for predictable income, often for life. This tends to produce the highest per-payment amount because the insurer pools longevity risk across many policyholders.
Systematic withdrawals let you set up automatic payments from your annuity on a schedule you choose, whether monthly, quarterly, or annually. Unlike annuitization, these withdrawals can be canceled or adjusted at any time. The tradeoff is that payments continue only until you stop them or your account runs out of money. The insurance company does not guarantee they will last for your lifetime.
Income riders (sometimes called guaranteed lifetime withdrawal benefits, or GLWBs) are optional features you can add to certain annuities, usually for an extra annual fee. A GLWB lets you withdraw a set percentage of a calculated “income benefit base” each year for life, without formally annuitizing the contract. Your withdrawal rate depends on your age when you start taking income, and rates increase the longer you wait. If you delay income for several years, many riders guarantee that your income benefit base grows by at least 5% simple interest per year for the first 10 years, giving you a higher guaranteed payment when you eventually turn on the income stream. You can still access your remaining account value if needed, though early withdrawals beyond the guaranteed amount typically reduce future benefits and may trigger surrender fees.
Annuitization Payout Structures
If you choose annuitization, you’ll pick from several payout structures. Each one balances the size of your payments against how much protection you and your beneficiaries get.
- Life only (straight life): The insurer pays you for as long as you live, and payments stop when you die. Nothing goes to heirs. Because the company takes on no obligation beyond your lifetime, this option produces the largest individual payment amount. It works best if you have no dependents or have already provided for them through other means.
- Period certain: You receive payments for a fixed number of years, commonly 10 or 20. If you die before the period ends, your beneficiary receives the remaining payments. This guarantees a minimum payout regardless of when you die, but payments stop once the chosen period expires, even if you’re still living.
- Life with period certain: A hybrid that pays you for life but includes a guaranteed minimum period (often 10 or 20 years). If you die during that window, your beneficiary collects the rest. You get lifetime income with some protection for heirs, though monthly payments will be somewhat lower than a pure life-only annuity.
- Joint and survivor: Payments continue as long as either you or a second person (usually a spouse) is alive. Some contracts reduce the payment amount after the first person dies, often to 50% or 75% of the original. This is the most common choice for couples relying on annuity income together.
Steps to Start Receiving Payments
The actual process of activating payments is straightforward, though a few details matter.
First, review your contract to understand what options are available and whether any surrender charges still apply. Most deferred annuities impose surrender fees if you withdraw money or annuitize within the first several years of the contract. These fees typically decline each year and eventually disappear, often after six to ten years.
Next, contact your insurance company or the financial advisor who sold you the contract. You’ll need to tell them which payout option you want, your desired payment frequency, and your start date. If you’re choosing a joint and survivor option, you’ll also need to provide information about your co-annuitant.
The insurer will send you an election form. You’ll typically need to provide identification, your Social Security number, tax withholding preferences, and bank account details for direct deposit. For larger annuity balances, some insurers require additional verification. Once the paperwork is processed, payments can begin within a few weeks to about a month.
If you’re buying a new immediate annuity (one designed to start paying right away rather than growing tax-deferred), you’ll fund it with a lump sum and payments typically begin within one month of signing the contract and making your premium payment. Immediate annuities can be purchased for as little as a few thousand dollars, though most people fund them with significantly more to generate meaningful income.
How Annuity Payments Are Taxed
The tax treatment of your payments depends on whether you bought the annuity with pre-tax or after-tax money.
If your annuity was funded with pre-tax dollars (inside an IRA or employer plan, for example), every payment is fully taxable as ordinary income, just like a paycheck.
If you bought the annuity with after-tax money (a “non-qualified” annuity), only the earnings portion of each payment is taxed. The IRS uses something called the exclusion ratio to split each payment into a tax-free return of your original investment and a taxable earnings portion. The ratio is calculated by dividing the total amount you paid into the contract by the total expected return over the payout period. For example, if you invested $100,000 and the insurer expects to pay you $200,000 over your lifetime, your exclusion ratio is 50%. That means half of each payment is tax-free and the other half is taxable income.
Once you’ve recovered your full original investment through the tax-free portions, every remaining payment becomes fully taxable. If you take systematic withdrawals instead of annuitizing, the IRS generally treats withdrawals as earnings-first, meaning you pay tax on the gains before you get back any of your original investment.
Choosing the Right Payment Timing
When you start payments matters for both the size of your income and your tax bill. Delaying annuitization or income rider activation generally increases each payment because your balance has more time to grow and the insurer’s payout period is shorter. With income riders specifically, withdrawal rates increase with age, so waiting even a few years can meaningfully boost your guaranteed annual income.
On the other hand, starting payments too early during a surrender period could cost you a percentage of your balance in fees. Check your contract’s surrender schedule before requesting any payouts. If you’re within a year or two of the surrender period ending, waiting can save you thousands.
Consider your other income sources as well. If you’re still working and in a higher tax bracket, starting annuity payments now means more of each payment goes to taxes. Waiting until retirement, when your income and tax rate may be lower, could let you keep more of each dollar.
What to Do if You Inherited an Annuity
If you inherited an annuity from someone who passed away, your options for receiving payments depend on your relationship to the original owner. Surviving spouses can usually continue the contract, change the payout option, or roll it into their own annuity. Non-spouse beneficiaries generally must begin taking distributions, either as a lump sum, within five years, or as payments spread over their life expectancy, depending on the contract terms and when the original owner died.
Inherited annuity payments are taxed on the same earnings-versus-principal split as regular annuity income. If the original owner had not yet started receiving payments, the full gain above their original investment will be taxable as you receive it. Contact the issuing insurance company directly to find out which distribution options your specific contract allows, as the rules vary by insurer and contract type.