Withdrawing Money From Annuities: Partial vs. Lump Sum

Selling only a portion of your annuity rather than the whole thing may be the answer to your immediate financial woes while also guaranteeing a secure income stream later.

Selling Part of Your Annuity

Annuities are wise financial investments because they provide guaranteed income over a long period of time. If you need cash now and choose to sell your annuity, you can choose to make a partial sale instead of selling your annuity in its entirety.

A partial withdrawal from an annuity is the best of both worlds because it means you’ll get some cash now and continue to receive annuity payments later.

There are a couple of ways to sell part of your annuity: a partial sale and a lump sum sale. These flexible selling options allow you to tailor the transaction to your family’s needs.

Partial Sale

In a partial sale, you can sell your right to receive a certain number of future payments or sell all of your payments during a certain period. The specifics differ depending on the type of annuity you have, how many payments you’ve received, which payments you’re looking to sell and when the disbursement period ends.

For example, if you have a 15-year annuity but you need enough money now for a down payment on a house, you can sell all of your payments from years one through three in exchange for cash. For those three years, you won’t receive annuity payments, but they will resume when the period ends.

In another example, your structured settlement may pay out $1,000 per month and an additional $5,000 every year for 20 years. You decide to go back to college, and to finance the tuition, you sell your first 10 annual payments.

Lump Sum Sale

With a lump sum sale option, you can sell a specific dollar amount of your structured settlement in exchange for a specific lump sum of cash. This amount will be deducted from future payout amounts. How it’s deducted is customizable and is something you can determine with the company that purchases your annuity.

For example, you might need $85,500 to move your parents into a nursing home. If the factoring company you work with uses a discount rate of 10 percent, you will need to sell $95,000 of your annuity. This $95,000 can be deducted equally from each disbursement, increased or decreased over time, or deducted in a variety of other ways.

Selling Additional Future Payments

One of the biggest advantages of selling some of your payments is the ability to sell more later, if need be.

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If you’ve already sold a portion of your payments but another financial need or emergency comes into play, you have the option of selling more structured settlement payments or the remainder of your contract later.

As long as you have money in your annuity contract, you can make as many transactions as you need to. There is no limit to the number of times you can sell money from an annuity.

Selling vs. Withdrawing

As an annuity owner, you have two ways to access immediate cash — withdraw funds from your annuity account or sell the right to future payments. Both will give you the cash you need, but withdrawing is accompanied by several negative consequences that selling can avoid, such as tax implications and surrender charges:

  • Tax Implications – Withdrawing funds from your annuity savings can also incur tax liabilities. If you withdraw funds before 59 ½ years old, the IRS will charge you a 10 percent penalty. In addition, premature withdrawals are considered taxable income and so may be charged federal and state taxes.
  • Surrender Charges – Annuity contracts include surrender charges to make up for the insurance company’s loss if you choose to withdraw before they can earn interest on your account. These charges typically decline every year over a decade or longer as the annuity becomes older and earns interest the insurance company can keep. If you withdraw more than is stipulated in your contract, you may also have to pay a surrender fee even after the surrender period is over.

Withdrawing funds from the insurance company that issued your annuity can come with expensive fees, which is why many choose to sell the right to their future payments instead. There are only a few negatives associated with selling future payments:

  • Reduced Death Benefit – If you have a death benefit, the balance of your annuity will transfer to your beneficiary after you die. If you do not sell any of your annuity payments, your annuity will grow over time, leaving your beneficiary with the possibility of a larger payout. A partial sales gives you cash now, but leaves your heir with less of an inheritance later.
  • Discount Rate – Selling the right to future payments is similar to getting a loan or advance on your annuity. In exchange for giving you cash up front, the factoring company that buys your annuity payments will want something in exchange — a discount. The percentage you give them off is called a discount rate. This number varies depending on how much you’re selling, when the company will receive the payments and market conditions.

In many cases, the discount rate associated with selling part of your annuity is less than the fees and taxes you’d owe if you withdrew from your annuity account. For this reason, selling part of an annuity is a popular option. If you’d like more specific information on how much these costs may be in your specific situation, call us to talk with a financial expert.

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