Individuals can buy a fixed annuity with either a lump sum of money or a series of payments over time. The insurance company, in turn, guarantees that the account will earn a certain rate of interest. This is known as the accumulation phase.
If the annuity owner, or annuitant, elects to begin receiving regular income from the annuity, the insurance company calculates those payments based on the amount of money in the account, the owner's age, how long the payments are to continue, and other factors. This begins the payout phase. The payout phase may continue for a specified number of years or for the rest of the owner's life.
During the accumulation phase, the account grows tax-deferred. When the owner begins receiving income, that money is taxed at their ordinary income tax rate. Annuity owners may also be allowed to make a limited number of withdrawals from the account before a payout phase begins.
*investopedia.com
