Income Annuities: What Are They and How Do They Work?

Key takeaways:

• An income annuity provides structured payments, either soon after purchase or later in life.

• Immediate income annuities generally begin payments soon after purchase, while deferred income annuities begin at a future date.

• Payout options may be based on one life, two lives or a set period, such as 10-year certain and life.

• Payment amounts depend on factors such as age, contribution amount, income start date, payout option and terms.

What is an income annuity?

An income annuity is a financial product that converts money you contribute into a stream of payments. Those payments may begin soon after purchase or at a future date, depending on the type of annuity and the terms.

Nate DeBoer, VP and actuary, Health + Annuity Solutions at Mutual of Omaha, explains that income annuities can provide “a fixed amount of income that lasts for your life.”

Lifetime income is a key reason income annuities play a role in retirement planning, especially as predictability in retirement becomes more important than ever. In the 2026 Mutual of Omaha Annuities Study, 93% of adults age 65+ said it would be useful to know, with certainty, that basic living expenses could be accounted for as long as they live.*

However, not all income annuities work the same way. Depending on the terms and payout option, payments may continue for one person’s lifetime, the lifetime of two people, such as spouses or partners, or for a set number of years.

How do income annuities work?

At its core, an income annuity provides an exchange, something Keith Lo, annuity product director at Mutual of Omaha, explains clearly: “You give a certain amount of money to the insurer, and you get a payment each period in return.”

While the details vary by contract, the process generally includes four decisions:

The terms set the details, including when income begins, how long payments continue and whether the annuity is fixed or indexed. Before choosing an income annuity, it’s helpful to review the terms with an insurance professional and see how it fits with your other retirement income sources.

Types of income annuities and payout options

Income annuities can be described in a few different ways: when payments begin, how values or payments are calculated and how long payments may continue. Understanding these differences can make it easier to compare your options.

How much income can an annuity provide?

The amount of annuity income you receive depends on several factors, including:

• How much money you contribute

• Your age when payments begin

• Whether payments are for one life or two

• Whether you choose a period certain feature

• Current interest rate environment

• Contract terms and optional features

• Insurer assumptions and pricing

For example, asking how much a $100,000 income annuity pays per month requires a quote based on your age, income start date, payout option and contract terms. A single life immediate income annuity may pay a different amount than a joint and survivor annuity or a 10-year certain and life annuity.

Potential benefits and considerations of income annuities

An income annuity can offer structure and predictability for part of your retirement income plan. But that predictability can come with considerations, especially around access to money, flexibility, taxes and beneficiary options.

That balance is important. 51% of adults aged 65+ said they somewhat or strongly prefer predictability over flexibility when it comes to retirement finances, while 40% said they value both equally.*

Before deciding whether an income annuity may fit your plan, it’s helpful to consider all possibilities.

Because income annuities are long-term products, liquidity is an important consideration. Lo offers this practical reminder:

Taxes are another factor to review. The tax treatment of annuity distributions can vary based on whether payments are periodic or nonperiodic, whether the annuity is qualified or nonqualified, your cost basis and how payments are structured.⁵ A financial or tax professional can help you understand how this fits into your overall tax plan.

How income annuities fit with Social Security, savings and retirement accounts

Retirement income often comes from more than one source. In the 2025 Mutual of Omaha Decumulation Study, 65% of fully retired respondents and 68% of near-retired respondents expected three or more income sources in retirement.** Among retired respondents, 96% expected Social Security to be a source of retirement income, while 52% expected savings and 46% expected a 401(k) or IRA to be part of their income mix.**

That’s why retirement income planning often starts with the full picture. DeBoer recommends that people “add up all of your income sources, whether that’s a pension, Social Security, or the interest income you receive from your investments, and look at whether there’s a gap there that an annuity can fill.”

An income annuity can play a role in that discussion by providing a defined stream of payments. Comparing it with other sources of retirement income can also help determine where it fits within an overall plan.

A financial professional with annuities expertise can help you compare how these options can work together. As DeBoer puts it, “Ask how an annuity fits into your overall retirement plan.”

Who may be a good fit for an income annuity?

Consider discussing an income annuity with a financial professional with annuities expertise if you’re looking to turn a portion of your retirement savings into regular payments. While it can provide dependable income, it may be less suitable if flexibility is a top priority. Your individual retirement needs and goals should guide how an annuity fits into your overall plan.

91% of retired adults agree that having guaranteed income gives them peace of mind.** While there are important considerations in determining if an income annuity is right for you, this finding highlights why predictable income remains a key focus in retirement planning.

Questions to ask before considering an income annuity

Before deciding whether an income annuity may fit your plan, ask:

• When would payments begin?

• Would payments be for my life, two lives or a set period?

• Are payments fixed, increasing or tied to another feature?

• How would payments be taxed?

• How does an annuity fit with my Social Security, pensions, 401(k)s, IRAs, savings and investments?