An annuity is intended to set-up a guaranteed distribution of income throughout retirement. Annuity contracts have two phases: the deferral phase, during which time the annuity can accumulate money, and the income phase, the point at which the client starts receiving payments.

A deferred annuity is designed to accumulate savings until the designated payment period. They can grow through interest rates alone (fixed annuity) or through stock or bond allocations (variable annuity). Gains during this period are not taxed until withdrawn.

A fixed indexed annuity has qualities of both fixed and variable annuities. Clients are often guaranteed a minimum return, while the annuity may also grow based on market performance over the course of the year. These annuities may have interest caps that prevent them from achieving the same amount of growth that would otherwise be seen in a variable annuity, while also offering some protection against depreciating index values.

An immediate annuity is designed to distribute savings with a tax-deferred growth factor, such as by providing a pension income. Payments from an immediate annuity may remain level or increase over time.

During the surrender period, the client is not able to withdraw funds from the annuity contract without penalty. Most surrender periods last between 5 to 10 years. Some companies will also allow the client to withdraw up to a certain amount (typically 10%) without the penalty.

An income rider can be attached to an annuity to further protect the value of the contract. Riders can be used to protect principal, protect downside risk, add guaranteed withdrawal benefits or add death benefits to the contract.

The required minimum distribution (RMD) is the minimum amount that must be withdrawn each year from all tax-advantaged retirement plans once the client reaches the age of 70.5.