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    How does an annuity work?

    December 6, 2024

    how does an annuity work?

    If you follow financial news, you may already know that some professionals have very strong opinions—both good and bad—about annuities. But how do you feel about them? Before you can answer that, you have to understand how annuities work and what they can provide.
     

    Just the basics of how annuities work

    So let’s start with the basics. An annuity is a contract between you and an insurance company. You pay them, either in a lump sum or through multiple payments. In return, the insurer agrees to pay you, either immediately or in the future, in one or a series of payments.

    To put how it works in layman’s terms: annuities are long-term, tax-deferred vehicles designed for retirement and are insurance contracts. Variable annuities and registered index-linked annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59½ unless an exception to the tax is met. Add-on living benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity and may be subject to conditions and limitations. There is no guarantee that a variable annuity with an add-on living benefit will provide sufficient supplemental retirement income.

    An annuity may be helpful in bridging the gap between the savings you’ve accumulated over the years and traditional sources of retirement income, like Social Security. Plus, if you don’t need the income immediately, you can let that money grow tax deferred.*

    Since the insurance company invests your money, your account value may be subject to market fluctuations. But some annuities have protections in place to keep you from losing everything. Still, there is some risk involved with owning an annuity.
     

    Types of annuities

    There are several kinds of annuities, which are meant to address different stages of life and risk tolerance. While this isn’t meant to be a complete list, a few examples include variable annuities (more risk with the potential for more growth), registered index-linked annuities (offers various levels of protection and options for growth), fixed-index annuities (less risk involved, with downside protection), and fixed annuities (growth potential through a fixed-rate of return).

    Next, we’ll answer some common questions we see around how annuities work.
     

    How do I know if an annuity will work for me?

    First, talk to your financial professional. They’ll be able to answer any additional questions you may have about how annuities work.

    In the meantime, we’ll give you some things to think about. Since there are many different types of annuities, each with its own features and fine print, we’ll keep this high level.

    Some annuities offer flexibility around the available options that can help meet your wants and needs. The following steps can serve as a starting point for you, while helping you think through which features you might benefit from:

    1. Decide when you need retirement income: you can invest a lump sum and choose to start receiving payouts immediately, or down the road.
    2. Choose which product types to discuss with your financial professional: we offer a variety of products that may fit your specific retirement needs.
    3. Customize your plan with unique options: Discover how add-on benefits,† available for an additional charge, can help provide income for life‡ or help you leave a legacy.

    Explore more resources in our “How to Plan for Retirement” guide.
     

    What are some key benefits of an annuity?

    With fewer pension plans available, diversifying§ your retirement portfolio is more important than ever. Here are some of the main advantages of annuities:

    • Tax deferral – money that can grow without being taxed on its earnings means it has the potential to grow faster than an investment that’s reduced by taxes. Of course, you will still have to pay tax on any earnings you make when you withdrawal them, but the higher the amount you start with, the more it can grow.
    • Lifetime guaranteed income – if you want income that’s guaranteed, no matter how long you live, some annuities offer that opportunity through an add-on benefit which is available for an additional cost.
    • Death benefit protection – want to leave a legacy? Annuities could offer that as well through an add-on death benefit for an additional cost. This may be something to consider.
       

    How does an annuity work in different phases of life?

    Life stages often determine how you spend and think about money. For example, someone just beginning a career may have a very different perspective on life in retirement than someone who’s only a decade away from it. This underscores that no two investors are the same. Therefore, their financial plans and the way a financial professional can help them decide how to approach inherent risks to investing in markets will also be different.

    Consider the following a 10,000-foot view of the journeys your money and your life may take. Each of these is hypothetical and your path may not resemble all or any of these circumstances. Annuities are designed to meet your needs at a a variety of stages of life, so it is important to understand how they can work for you in each stage.
     

    Stage 1: Growth

    Accumulation stage: Pre-retirement, early in career

    • Is worried about not being able to retire
    • Might have an IRA and a 401(k)
    • Tends to get anxious about investing in the market
    • Is education planning for a child
       

    Stage 2: Guarantee

    Income distribution stage: Entering retirement

    • No pension
    • No 401(k)
    • No guaranteed income stream in place, or looking for supplemental income
    • Worries about how taxes will impact nest egg
       

    Stage 3: Giving

    Legacy protection stage: Late in retirement

    • Wants to leave money to children and grandchildren or to a charity
    • Would like the option to take income, but doesn’t need it every year
    • Is primarily interested in a product with a death benefit to ensure legacy planning wishes are met
    • Has a diverse portfolio and a sizable nest egg

    Can an annuity help you reach your goals? That’s up to you and your financial professional. But if you’re looking for reliable income in retirement, it may be worth discussing.
     

    Is there a “catch” with annuities?

    It’s not that there’s a catch with an annuity, but, just like everything else in life, nothing is free. You'll often pay a contract charge related to the product you purchase along with charges for any add-on benefits you choose, in exchange for some security. And, depending on the type of annuity you choose, your financial professional may charge you a commission or advisory fee. All of those costs, as well as any additional charges not discussed here, should be taken into consideration when making a decision.

    That said, many people who like annuities enjoy the stability, income protection, and options they can offer. Just like everything, it truly depends on your unique goals and financial plan.

    So, are annuities right for everyone? No—but nothing is. Talk to your financial professional today about how an annuity might fit into your portfolio.

    Until then, explore some additional articles and information here:

    How to plan for reitrement

    What is an annuity?

    *Tax deferral offers no additional value if an IRA or a qualified plan, such as a 401(k), is used to fund an annuity and may be found at a lower cost in other investment products. It also may not be available if the annuity is owned by a legal entity such as a corporation or certain types of trusts.

    †Add-on benefits that provide income for the length of a designated life and/or lives may be available for an additional charge. The amount of income that these benefits may provide can vary depending on the age when income is taken, and how many lives are covered when the benefit is elected. The cost of these benefits may negatively impact the contract's cash value. There is no guarantee that a variable annuity with an add-on living benefit will provide sufficient supplemental retirement income.

    ‡Lifetime income of the add-on lifetime benefits available with our annuities becomes effective at issue if the designated life is age 59½ at issue, or upon the contract anniversary following designated life's 59½ birthday, provided the contract value is greater than zero and has not been annuitized.

    §Diversification does not ensure a profit or protect against loss.

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    Before investing, investors should carefully consider the investment objectives, risks, charges, and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses provide this and other important information. Please contact your financial professional or the Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money.

    Jackson, its distributors, and their respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Tax laws are complicated and subject to change. Tax results may depend on each taxpayer’s individual set of facts and circumstances. Clients should rely on their own independent advisors as to any tax, accounting, or legal statements made herein.

    Guarantees are backed by the claims-paying ability of Jackson National Life Insurance Company or Jackson National Life Insurance Company of New York and do not apply to the principal amount or investment performance of a variable annuity’s separate account or its underlying investments. They are not backed by the broker/dealer from which this annuity contract is purchased, by the insurance agency from which this annuity contract is purchased, or any affiliates of those entities, and none makes any representations or guarantees regarding the claims-paying ability of Jackson National Life Insurance Company or Jackson National Life Insurance Company of New York.

    For variable annuities, a contract charge and subaccount charges will apply. For fixed index annuities, withdrawals may be subject to a market value adjustment. For registered index-linked annuities, a market value adjustment may apply to withdrawals and transfers during the first six years of the contract and may be subject to an interim value adjustment.

    The latest maturity date or income date allowed under an annuity contract is age 95, which is the required age to annuitize or take a lump sum. Please see the prospectus for important information regarding the annuitization of a variable annuity contract.

    Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York).  Annuities are distributed by Jackson National Life Distributors LLC, member FINRA. These contracts have limitations and restrictions. Jackson issues other annuities with similar features, benefits, limitations, and charges. Contact Jackson for more information.

    Jackson® is the marketing name for Jackson Financial Inc., Jackson National Life Insurance Company®, and Jackson National Life Insurance Company of New York®.