What Is an Annuitant?
An annuitant is an individual who is entitled to receive regular payments from a pension or an annuity investment. An annuitant may be the contract holder or another person, such as a surviving spouse. Annuities are commonly recognized as supplements to retirement income and can be associated with employee pension plans or life insurance products. The size of the payments is typically determined by the annuitant’s life expectancy and the amount invested.
Key Takeaways
- An annuitant is either an investor or a pension plan beneficiary who has the right to receive periodic payments from an annuity investment.
- The annuitant may qualify for either a deferred annuity or an immediate annuity.
- A deferred annuity often functions as a retirement investment, similar to an IRA or 401(k).
Understanding Annuitants
An annuity provides a regular payment of guaranteed income for life or for a determined number of years. For example, an annuitant could be a retired civil servant who receives payments from a pension plan or an investor who has made a lump sum payment to an insurance company in exchange for regular income supplements.
Depending on the specifics of the contract, the owner of an annuity can name multiple annuitants, such as a spouse and an elderly parent, or set up a joint annuity. The annuitant can also arrange for the payments to be transferred to a surviving spouse if necessary. It must be noted that the annuitant needs to be a person, not a company or a trust.
The amount of the payments is determined by the annuitant’s age and life expectancy, as well as the age and life expectancy of any beneficiaries. For instance, if an annuitant is 65 but the annuity is transferrable to his 60-year-old wife in the event of his demise, the insurance company will calculate the payments based on a life expectancy that often spans approximately 24 more years.
Another option available for annuities is the “life-plus” term, meaning payments continue for the annuitant’s lifetime and thereafter for a specified period to a surviving spouse.
Types of Annuities
There are several variations of annuities, but they are generally categorized into two basic types:
- Deferred Annuity: This is a popular retirement savings method. The annuitant consistently invests money over time in return for a stream of payments slated to begin in the future. Many company pension plans follow this structure.
- Immediate Annuity: This starts payments right away. The annuitant pays a lump sum in exchange for payments that commence immediately and continue for a lifetime or a determined period, in the case of a life plus period certain annuity.
Taxes on Annuitants
Annuities are typically taxed as ordinary income. Only the gain portion of the annuity payments, not the contract holder’s original contribution, is taxed. In the case of employer pensions, the entire payment is generally taxed as ordinary income.
Related Terms: retirement plan, IRA, 401(k), life insurance, investor.
