You do not have to annuitize an annuity, and you control the timing of your income. A deferred growth annuity lets you leave the balance to grow or withdraw up to about 10% a year, taking income when you choose. Annuitizing instead locks the balance into a fixed lifetime income that generally cannot be undone. You trade a higher guaranteed payout for control, access, and leaving the remainder to heirs.
Is this a fit for you?
Who This Is For
- You want to keep control of and access to your money
- You are not sure when you will need income
- You want to be able to leave the remaining balance to heirs
- You value flexibility over a locked, fixed payout
- You want to take withdrawals in some years and none in others
Who This Is Not For
- You want the highest guaranteed lifetime payout available
- You want to fully transfer longevity risk to the insurer
- You worry you would spend down a balance you can access
- You prefer the simplicity of one fixed check
- You have no need for liquidity or a legacy from this money
How do the options compare?
| Feature | Deferred Growth Annuity | Annuitized Income (SPIA) |
|---|---|---|
| Control of principal | You retain control of the balance | You give up the balance to the insurer |
| Access and liquidity | Penalty-free withdrawals up to about 10% per year, varies by contract | No access once income begins |
| Income flexibility | Turn income on or off, take more in some years and none in others | Fixed check on a set schedule |
| Relative payout size | Lower, since there are no mortality credits | Higher guaranteed payout with mortality credits |
| Left to heirs | Remaining balance can pass to heirs | Generally less or nothing, depending on options elected |
| Reversible | You can change course and keep the balance | Generally cannot be undone once annuitized |
What are the risks, costs, and alternatives?
The penalty-free withdrawal amount is limited
The penalty-free withdrawal percentage varies by contract and is commonly around 10% per year. Withdrawals above that amount during the surrender period trigger surrender charges, which reduce the value you receive.
IRS penalty on early gains
A 10% IRS penalty can apply to gains taken before age 59 and a half, in addition to ordinary income tax on those gains. This is a tax rule, separate from any surrender charge the insurer applies.
Keeping control means keeping discipline
Because you can access the balance, the responsibility to pace withdrawals stays with you. Keeping control means keeping the discipline not to overspend, so the money is still there in later years when you may need it.
You give up mortality credits
Choosing growth over annuitizing gives up mortality credits, so the eventual lifetime payout can be lower than annuitizing would provide. Annuitizing pools longevity risk across many contract holders, which is what funds the higher guaranteed payout.
What does this look like in practice?
Two Retirees, Two Approaches to the Same Balance
Illustrative example: not an actual client.
A retiree who wants income optionality keeps a deferred annuity rather than annuitizing. In years when other income covers the bills, they take little or nothing from the contract. In leaner years, they take up to the penalty-free amount, roughly 10% of the balance, to bridge the gap. Because they never converted the balance into a fixed income stream, the remaining value stays theirs to pass to heirs.
A peer with a similar balance chooses to annuitize instead. They receive a larger fixed check every month, supported by mortality credits and backed by the guarantee of the issuing insurer. That certainty comes with tradeoffs: they have no access to the underlying money, no flexibility to skip or increase a year's income, and generally leave nothing from that money to heirs.
Neither approach is universally better. The first prioritizes control, access, and legacy. The second prioritizes the highest guaranteed payout and the transfer of longevity risk to the insurer. The right choice depends on which of those matters most for a given household.
Illustrative scenario for educational purposes. Withdrawal limits, surrender charges, and income options vary by contract. Any guarantee is subject to the claims-paying ability of the issuing insurance company.
Common Questions
Do I have to annuitize my annuity?
No. With a deferred growth annuity you can leave the balance to grow and take income when you choose, rather than converting it to a fixed lifetime payout. Annuitizing is one option that produces a higher guaranteed payment, subject to the claims-paying ability of the issuing insurance company, but it generally cannot be undone once you elect it.
What are mortality credits, and why does annuitizing pay more?
Annuitizing pools longevity risk across many contract holders, and those who die earlier effectively subsidize those who live longer. That pooling, called mortality credits, is what funds a higher guaranteed payout than a growth annuity can offer, subject to the claims-paying ability of the issuing insurance company. Choosing growth instead gives up those credits.
How much can I withdraw from a growth annuity each year?
The penalty-free withdrawal amount varies by contract and is commonly around 10% per year. Withdrawals above that during the surrender period trigger surrender charges that reduce the value you receive. Gains taken before age 59 and a half can also face a 10% IRS penalty on top of ordinary income tax.
Can I still leave money to my heirs if I keep a growth annuity?
Yes. Because a deferred growth annuity keeps the balance under your control, any remaining value can generally pass to your heirs. Annuitizing instead typically leaves less or nothing to beneficiaries, depending on the payout options elected. Keeping control does require the discipline to pace withdrawals so the balance lasts.
Related Questions
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