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How Does the Accumulation Period for an Annuity Work?

The accumulation period is a set timeframe when the value of your annuity grows from your contributions, investment returns and the compounding of interest. Annuities are designed for long-term income and savings, and insurance companies expect to hold the premiums for an extended period.


During the accumulation period, you aren’t responsible for paying taxes on your earnings. Taxes are only due once you reach the payout phase.

It’s important to note that not all annuity types have an accumulation period. While there are two main types of annuities, deferred and immediate, only deferred annuities have an accumulation period. 

Immediate annuities — specifically single premium immediate annuities — don’t have an accumulation period, because they’re converted to a stream of payments at the time the contract is purchased. 

How Your Contribution Period Increases Your Annuity’s Worth

Your contributions can be a single lump sum, flexible period payments or fixed scheduled payments. Those who contribute a series of payments are looking to build their annuity’s worth over time to solidify their retirement plan. 
Investment Returns
Your annuity can provide higher returns if you invest in a mutual fund or tie your returns to a specific market index. Different deferred annuity types yield varied results. 
Compounding of Interest
Compounded interest is the interest you earn on your principal investment and previously earned interest.

Source: Texas Insurance Department

During your accumulation period your annuity may grow at a fixed rate, or it may be based on the performance of investments. Make sure you understand how growth is credited before purchasing one.

What Are the Features and Characteristics of an Accumulation Period?

One important feature of the accumulation period is its flexibility — you determine when your annuity shifts into the payout period. 

“The cool thing is, you can make your accumulation period shorter or longer, depending on what you need,” Andrew Gosselin, CFP®, told

“It’s pretty handy because, let’s face it, life changes, and so can your retirement plans and money situation. Let’s say you need to start getting some income earlier than you first thought. You can choose to cut that accumulation period short and start getting your money sooner. On the flip side, if you find you can keep on working past when you planned to retire or maybe you got some money from somewhere else, you can make the accumulation period longer.”

You also need to consider your withdrawals and contributions. During an accumulation period, your withdrawals are limited, but there aren’t restrictions on how much you can contribute. 

“These contributions are not capped in most instances. You can invest as much as you’re comfortable with, depending on your future income needs. That said, there might be some restrictions depending on the specific annuity product.” Gosselin told

You can withdraw funds during the accumulation period, but you may face tax penalties and surrender charges — typically a percentage of the withdrawn total.

These charges are incurred during the surrender period, which can last up to 10 years. These penalties are typically around 10% of the current value of the contract, but they usually decline as you advance throughout the accumulation period.

It is counterproductive to withdraw money from tax-deferred savings instruments before their value has matured. Tax-deferred compound interest adds up significantly over time. Similar to taking money out of a 401(k) prior to retirement, withdrawing funds from a deferred annuity during the accumulation period will have an adverse effect on your ability to grow your savings.

What Affects the Accumulation Period?

Gosselin offered advice on factors affecting the success of an annuity’s accumulation period. “The length and success of the accumulation period can be influenced by a variety of factors. Market performance is one key determinant — the better the market does, the more your annuity can grow.”

“Another important factor is the duration of the accumulation period itself. The longer you allow your money to grow, the more it will accumulate, thanks to the power of compounding. Lastly, the amount of your contributions can make a significant difference. Larger and more frequent contributions can lead to a more robust accumulation.”

It’s important to compare the advantages and disadvantages of the factors listed above. For example, a longer accumulation period gets you the most growth in the long run. However, not everyone has the ability to delay their payments. You need t

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 2, 2024