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    How does an annuity work?

    July 10, 2026

    how does an annuity work?

    If you've been hearing more about annuities lately, you're not alone. As more Americans consider how to make their retirement savings last, annuities have become an increasingly common part of financial planning conversations. According to the 2025 Protected Retirement Income and Planning Study conducted by the Alliance for Lifetime Income by LIMRA, 54% of Baby Boomers and Gen X investors say they're worried about outliving their assets in retirement.¹ This worry brings a curiosity about how annuities actually work.
     

    What is an annuity?

    An annuity is a contract between you and an insurance company. You make a payment, either as a lump sum or through a series of contributions, and in return, the insurer agrees to pay you back, either right away or at a future date of your choice. Understanding the basics is a good step toward a more productive conversation with your financial professional.

    Annuities are designed to supplement other retirement income sources—like Social Security, personal savings and pensions. The amount you receive depends on factors like the type of annuity, how much you invest and prevailing interest rates. Because there are several types, each with its own features and benefits, working with a financial professional can help you determine which might work best based on your specific needs.
     

    Types of annuities

    There are several types of annuities, each designed to address different stages of life and varying degrees of risk tolerance. Variable annuities carry more risk but offer the potential for more growth, while registered index-linked annuities (RILAs) offer levels of protection alongside options for growth. For those seeking less market exposure, fixed index annuities provide downside protection, and fixed annuities offer steady growth potential through a fixed rate of return.
     

    Key benefits of an annuity

    With fewer traditional pensions available, creating your own reliable income stream in retirement has become more important than ever. Annuities can help address that need in a few beneficial ways.

    Tax deferral:* any gains within an annuity are not taxed until you begin taking withdrawals, which means your money has the opportunity to grow without being reduced by taxes along the way. The higher the amount you start with, the more potential it has to grow over time.

    Guaranteed† lifetime income:‡ for those who want income that lasts no matter how long they live, some annuities offer guaranteed lifetime income through an add-on benefit§ available for an additional cost. It's a feature that directly addresses one of the most common concerns in retirement planning—the possibility of outliving your savings.

    Death benefit protection: for those looking to leave a legacy, some annuities offer an add-on death benefit for an additional cost. It can be a way to make sure the people you care about are taken care of even after you're gone.
     

    How annuities work across different stages of life

    No two investors are the same, and the role an annuity plays in a retirement plan often depends on where you are in life. Annuities are designed to meet different needs at different life stages, so understanding the variety of ways they can work is a useful place to start.
     

    Stage 1: growth

    Accumulation stage: pre-retirement, early in career

    In the earlier stages of your career, retirement may feel far away—but the decisions you make now can have a lasting impact. An annuity at this stage is primarily for growth and accumulation, giving your money the opportunity to grow tax-deferred over time. This stage may resonate if you:

    • Are focused on building enough to retire comfortably.
    • Have an IRA or 401(k) and are looking for additional ways to save.
    • Feel uncertain about investing in the market and want some level of protection.
    • Are balancing retirement savings with other financial priorities like educational planning.
       

    Stage 2: guarantee

    Income distribution stage: entering retirement

    As retirement approaches (or begins), the conversation starts to shift from building wealth to protecting what you have and generating a reliable income. For those without a pension or a guaranteed income stream, an annuity can help fill that gap. This stage may resonate if you:

    • Don't have a pension or a guaranteed income source beyond Social Security.
    • Are looking for a reliable income stream to supplement your savings.
    • Want to manage how taxes will affect your nest egg in retirement.
       

    Stage 3: giving

    Legacy protection stage: Fully in retirement

    Once fully in retirement (whatever that looks like for you), priorities often shift toward what you want to leave behind. An annuity with a death benefit can help make sure the people you care about are taken care of, even if you don't need to draw income every year. This stage may resonate if you:

    • Want to leave assets to children, grandchildren or a charity.
    • Prefer the option to take income without being required to do so annually.
    • Have a diverse** portfolio and are primarily focused on legacy planning.
       

    Is an annuity right for you?

    Annuities can be a valuable part of a retirement income plan, but they aren't right for every investor or every situation. Like most financial products, they come with costs worth understanding. You'll typically pay a contract charge related to the product you purchase, along with additional charges for any add-on benefits you choose. Depending on the type of annuity, your financial professional may also charge an advisory fee. If you think you may need access to your funds before a contract's surrender period ends, it's important to discuss what early withdrawal fees could cost.

    Many people find real value in what annuities can offer: stability, income protection and options that can be tailored to where you are in life. Whether or not an annuity is the right fit for you, the best place to start is a conversation with a financial professional who can evaluate your full retirement picture and help you determine whether an annuity supports your personal retirement goals.

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    *Tax deferral offers no additional value if an IRA or a qualified plan, such as a 401(k), is used to fund an annuity and may be found at a lower cost in other investment products. It also may not be available if the annuity is owned by a legal entity such as a corporation or certain types of trusts.

    †Guarantees are backed by the claims-paying ability of Jackson National Life Insurance Company or Jackson National Life Insurance Company of New York.

    ‡On the contract anniversary on or immediately following the designated life's attained age 59½, the for-life guarantee becomes effective provided: 1) the contract value is greater than zero and 2) the contract has not been annuitized. If the designated life is age 59½ on the effective date of the endorsement, then the for-life guarantee becomes effective on that date.

    §Add-on benefits that provide income for the length of a designated life and/or lives may be available for an additional charge. The amount of income that these benefits may provide can vary depending on the age when income is taken, and how many lives are covered when the benefit is elected. The cost of these benefits may negatively impact the contract's cash value. There is no guarantee that an annuity with an add-on living benefit will provide sufficient supplemental retirement income.

    **Diversification does not assure a profit or protect against loss in a declining market.

    1. Alliance for Lifetime Income by LIMRA, "2025 Protected Retirement Income and Planning (PRIP) Study," LIMRA Consumer, 2025. 

    Annuities are long-term, tax-deferred vehicles designed for retirement. Variable annuities and registered index-linked annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59½ unless an exception to the tax is met. Add-on benefits are available for an extra charge in addition to the ongoing fees and expenses of the annuity and may be subject to conditions and limitations.

    Before investing, investors should carefully consider the investment objectives, risks, charges, and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses provide this and other important information. Please contact your financial professional or the Company to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money.

    Jackson, its distributors, and their respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Tax laws are complicated and subject to change. Tax results may depend on each taxpayer’s individual set of facts and circumstances. Clients should rely on their own independent advisors as to any tax, accounting, or legal statements made herein.

    Guarantees are backed by the claims-paying ability of Jackson National Life Insurance Company or Jackson National Life Insurance Company of New York. They are not backed by the broker/dealer from which this annuity contract is purchased, by the insurance agency from which this annuity contract is purchased, or any affiliates of those entities, and none makes any representations or guarantees regarding the claims-paying ability of Jackson National Life Insurance Company or Jackson National Life Insurance Company of New York. 

    The latest maturity date or income date allowed under an annuity contract is age 95, which is the required age to annuitize or take a lump sum. Please see the prospectus for important information regarding the annuitization of a variable annuity contract.

    Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York).  Annuities are distributed by Jackson National Life Distributors LLC, member FINRA. These contracts have limitations and restrictions. Jackson issues other annuities with similar features, benefits, limitations, and charges. Contact Jackson for more information.

    Jackson® is the marketing name for Jackson Financial Inc., Jackson National Life Insurance Company®, and Jackson National Life Insurance Company of New York®.

    Products and features may be limited by state availability, and/or your selling firm's policies and regulatory requirements (including standard of conduct rules).