Immediate Annuity

Immediate annuities are commonly bought by people at or near retirement to turn part of their savings into a guaranteed income. Payments typically begin within a month to a year of purchase.

For example, a 65-year-old might use 200,000 to buy an immediate lifetime annuity paying a fixed monthly income for as long as they live. The exact amount depends on their age, health, interest rates at the time and the features chosen.

Options can include payments that continue to a spouse after death, a guaranteed minimum payment period, and payments that increase each year to help offset inflation, which reduces the starting income.

The main advantage is protection against outliving savings, known as longevity risk. Disadvantages include giving up access to the lump sum, the possibility of dying early and receiving less than was paid, and, for fixed payments, loss of purchasing power over time. Annuity rates are higher when interest rates are high and for older buyers. In the United Kingdom and some other countries, people in poor health may qualify for enhanced annuities with higher payments.