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An accumulation period for a deferred annuity is the span of time during which the annuity owner’s premiums increase in value. Withdrawals are limited during the accumulation period.

During a deferred annuity’s accumulation period, interest accrues according to the rate and timeframe set in the contract. At the end of the accumulation period, the contract is either annuitized or cashed out for a lump sum.

Immediate annuities — specifically single premium immediate annuities and deferred income annuities — are converted to a stream of payments at the time the contract is purchased, and so do not have an accumulation period.

How Does the Accumulation Period for a Deferred Annuity Work?

Annuities are designed for long-term income and savings, and insurance companies expect to hold the premiums for an extended period of time. They pool and invest the premiums to generate returns and cover the income benefits they pay annuitants during the payout, or distribution, phase of the contracts they have issued.

Deferred annuities have an accumulation phase followed by a payout phase. During the accumulation period, the annuity earns interest and, in cases of flexible premium annuities, the annuity owner adds money in the form of additional premium payments. During this time, the value of the annuity contract grows.

Annuity withdrawals are limited during the accumulation phase. During the surrender period, which can last up to 10 years, some contracts allow for free withdrawals. These are typically around 10 percent of the current value of the contract.

From the point of view of the annuitant, annuities should provide guaranteed income in retirement. It would be counterproductive to withdraw money from these tax-deferred savings instruments before their value has increased. Tax-deferred compound interest adds up significantly over time, so, similar to taking money out of a 401(k), withdrawing funds from a deferred annuity will have an amplified effect on its cash value at the end of the accumulation period.

For insurance companies, early withdrawals from deferred annuities affect their portfolios. Insurance companies make money by investing the pooled premiums from annuity holders and life insurance policyholders. The insurer expects to hold its customers’ premiums for a long time. When an annuity holder withdraws money during the accumulation period, the insurer’s bottom line is affected.

You can withdraw funds during the accumulation period, but you may face tax penalties and surrender charges — typically a percentage of the withdrawn total. Insurance companies assess surrender charges as part of a strategy to discourage early withdrawals and offset prospective profit losses. The penalties generally decrease as the contract nears the end of the surrender period.

Interested in Buying an Annuity?
Learn about the different types of annuities and find out which one is right for you.

Do all Annuities Have an Accumulation Period?

Not all annuities have accumulation periods. Accumulation periods are specific to deferred annuities, and they end when the premiums are converted to an income stream. This conversion is referred to annuitization.

Immediate annuities, also known as income annuities, don’t have an accumulation phase because they are annuitized at the time of purchase. This is true even of deferred income annuities (DIAs), which defer income payments beyond the one-year mark that is typical of immediate annuities.

To clarify: a deferred income annuity is technically an immediate annuity because its premium is instantly converted to an income stream. This means that, even though the payments are delayed, there is no accumulation period for a deferred income annuity.

What to Consider Before Buying an Annuity with an Accumulation Period

According to the National Association of Insurance Commissioners, “Annuity contributions earn interest that can grow tax-deferred in the accumulation phase and can provide income for life in the income payment phase. These characteristics make annuities a popular choice among retirement income vehicles.”

It is, however, important to consider several factors before committing to an annuity that has an accumulation period.

Before you buy an annuity, assess your immediate needs and your long-term goals.
Do you have enough money to cover your expenses right now? Do you have any monetary commitments approaching soon, such as college tuition for yourself or a loved one? These long-term insurance products are not ideal for reaching short-term investment goals or immediate financial needs, and having your money tied up in an annuity can cause problems if you don’t have enough cash on hand for your daily living expenses.
Opportunity cost
While the annuity is in its accumulation period, you may be missing the opportunity to pursue other investments — some of which may have higher return potential. Consider your time horizon and risk tolerance before allocating your assets to these low-risk, low-return products. Consult a financial advisor to determine how a deferred annuity might fit your portfolio.
Financial goals
What are your current and future priorities and objectives? Perhaps you are planning for future retirement income, allowing adequate time for growth. Your actions now will affect your payout later. Whether you are saving money now or actively contributing to an annuity, tax deferral and other tax strategies are important considerations.

Mapping out your savings timeline and understanding your investments’ accumulation periods can prepare you for retirement planning — and ultimately help you reach your financial objectives.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: March 29, 2021

2 Cited Research Articles

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  1. National Association of Insurance Commissioners. (2020, September 3). Annuities. Retrieved from https://content.naic.org/cipr_topics/topic_annuities.htm
  2. U.S. Securities and Exchange Commission. (2018, October 30). Updated Investor Bulletin: Variable Annuities. Retrieved from https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-5#Annuity_Fees