Definition: An annuitant is an individual or a business entitled to receive payments from a pension or annuity investment despite being unable to contribute to the fund’s operation directly. An example of this is when a retired person receives a monthly payment from a pension plan rather than having their salary paid directly by the government. An annuitant may be the sole owner, co-tenant, resident, or successor of a deceased individual. Common circumstances include being appointed as a representative, Trustee, or Executor of a will.
Payments may be made periodically or at regular intervals, and the payout can be either fixed or variable. Payments can be either pay immediately or deferred depending on the investor’s desire for payments at different periods. The terms and conditions can be highly complex and often include both biological constraints and financial ones.
Types of Annuity
- The deferred annuitant is someone who has invested money in a pension plan (either voluntarily or when pushed by the company). They will receive regular monthly payments from the company, usually in the form of a pension check.
However, they can choose to invest some or all of this money themselves and receive any profits after expenses. Sometimes, the payments are delayed until after the death of an owner of the company or until after a certain number of years of service.
- An immediate annuity is a guaranteed cash flow event that provides income for the rest of your life. This type of contract is often referred to as a cash flow contract because it regularly pays out cash without uncertainty about what will happen in the future.
This type of contract protects investors against significant life events such as disability, divorce, or the death of the principal debtor. The immediate annuity is the same as an extra pension but payable immediately on reaching age 60. Unlike a pension, it does not reduce the present value of future payments but increases them by an amount equal to the rate of principal payable at the time of retirement or death of the deceased.
Annuitants are people who purchase a life annuity from a financial planner, insurance agent, investment advisor, or other providers. They don’t take out a traditional loan but purchase an IOU from the provider. Although the annuitant receives the cash upfront, this is considered the purchase of goods and services and not income. Selling an annuity involves risk because the provider may decide to stop offering it later or raise premiums slightly. However, the risk is usually low because the provider has assets that could be genuinely lost without the payout.
If you are an annuitant, the payments you receive from an employer pension or annuity plan are generally taxed as ordinary income. The portion of the payments representing the contract holder’s basis is not taxed, only the gain portion. If it is an employer pension, the entire payment is generally taxed as ordinary income. Unlike most types of retirement income, the amount you receive from an annuity is taxed at your regular tax rate regardless of how much you earn from it. However, unlike capital gains, income from an annuity does not cease when you die. So if you die before receiving any payments from an annuity, any income still belongs to you even though a tax-free organization receives it.