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Immediate Variable Annuity: Definition, How It Works, Pros & Cons

Last updated 03/15/2024 by

Dan Agbo

Edited by

Fact checked by

An immediate variable annuity allows individuals to receive payments right away after investing a lump sum. Unlike other annuities, it skips the accumulation phase and begins the annuitization phase immediately. This article explores the workings, advantages, and drawbacks of immediate variable annuities.

What is an immediate variable annuity?

An immediate variable annuity is a financial product that allows individuals to convert a lump sum of money into a stream of payments, starting immediately. Unlike traditional annuities, which typically have an accumulation phase where payments grow tax-deferred before converting to income, immediate variable annuities bypass this phase and begin distributing income right away. The key feature of immediate variable annuities is their flexibility in payments, which are tied to the performance of underlying investments.

How it works

Immediate variable annuities function differently from traditional annuities in that they skip the accumulation phase. Instead of making periodic payments over time to build up a retirement fund, individuals make a single lump-sum payment to purchase an immediate variable annuity. This lump-sum is then immediately converted into a series of payments that continue for the lifetime of the annuitant. These payments fluctuate based on the performance of the underlying investment portfolio, which typically consists of a mix of stocks, bonds, and other assets.
Immediate variable annuities are particularly attractive to older investors who are looking to secure a steady stream of income without waiting for an accumulation period. However, they come with risks similar to standard variable annuities, including the potential for decreased payments if the value of the underlying assets declines. Despite these risks, immediate variable annuities can provide a valuable source of retirement income for individuals seeking flexibility and the potential for higher returns.

Immediate variable annuity vs. Immediate fixed annuity

Immediate fixed annuities and immediate variable annuities are two distinct types of annuities that offer different payment structures and levels of risk.
Immediate fixed annuities provide a guaranteed stream of payments that do not change regardless of market performance. These annuities are ideal for individuals seeking a stable income stream without exposure to market fluctuations. However, the downside is that the payments may not keep pace with inflation over time.
On the other hand, immediate variable annuities offer the potential for higher returns but come with greater risk. The payments from immediate variable annuities are linked to the performance of underlying investments, such as stocks and bonds. While this means payments can increase if the investments perform well, they can also decrease if the investments underperform. As a result, immediate variable annuities are more suitable for individuals willing to accept market risk in exchange for the possibility of higher returns.

The bottom line

Immediate variable annuities offer a unique way to start receiving income immediately without an accumulation phase. While they provide potential for higher returns, they also come with higher risks, making them suitable for certain investors, particularly those concerned about outliving their savings. It’s essential for investors to carefully consider the pros and cons, fees, and guarantees before investing in immediate variable annuities.
Here are the pros and cons of immediate variable annuities:
  • Immediate income without accumulation phase
  • Potential for higher returns if underlying investments perform well
  • Can provide a hedge against inflation
  • Payments may decrease if market performance is poor
  • No guarantees on returns
  • High fees may accompany guarantees

Frequently asked questions

What are the tax implications of immediate variable annuities?

Immediate variable annuities do not offer the same tax advantages as other retirement accounts like 401(k)s or IRAs.

Can an immediate variable annuity protect against inflation?

Yes, immediate variable annuities have the potential to provide a hedge against inflation as payments may increase if underlying investments perform well.

What happens if the market performs poorly?

If the market performs poorly, the payments from an immediate variable annuity may decrease, posing a risk to the annuitant’s income.

Are there any guarantees with immediate variable annuities?

Some providers may offer guarantees on a portion of the variable payments, but these often come with higher fees.

Who should consider investing in immediate variable annuities?

Immediate variable annuities may be suitable for older investors concerned about outliving their savings and seeking immediate income.

Key takeaways

  • Immediate variable annuities provide immediate income without an accumulation phase.
  • They offer potential for higher returns but also carry higher risks.
  • Payments may fluctuate based on market performance.
  • Investors should carefully consider fees and guarantees before investing.
  • Immediate variable annuities may be suitable for older investors seeking immediate income.

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