Definition
Income phase is the period in an annuity contract during which the contract is paying income to the contract owner, following any accumulation phase and the act of annuitization or income commencement.
Why it matters
The income phase is the stage at which the value of the contract is realized as cash flow rather than as account balance. Whether the income phase is reached, how long it lasts, and how its payments are structured determine what the contract actually delivers to the contract owner. Many deferred annuities are surrendered, exchanged, or otherwise terminated before the income phase begins, so the contractual income phase and the realized income phase are not the same.
How it works
The income phase begins when the contract owner elects to begin receiving income, typically through one of several actions: annuitizing the contract under a payout option, activating an income rider on a contract that has one, or initiating systematic withdrawals from a contract with sufficient account value. For an immediate annuity, the income phase begins essentially at issue, with no accumulation phase. For a deferred income annuity and a qualified longevity annuity contract, the income phase begins at the contractually specified income start date. Once the income phase begins under an annuitization election, the structure of payments is determined by the payout option selected.
In practice
An individual deciding whether and when to enter the income phase should determine which mechanism initiates it for the specific contract — annuitization, income rider activation, or systematic withdrawal — and what each option produces and forecloses. Annuitization typically eliminates access to the underlying capital; income rider activation typically preserves account value subject to the rider's withdrawal rules; systematic withdrawal preserves account value but offers no lifetime guarantee. The contract's annuity date (the latest age at which annuitization must occur, if any) should be confirmed against the contract owner's planning timeline. An advisor should be asked to show what each mechanism would produce in the current rate environment and what conditions would change those figures.
In the Longevity Standard Framework
The income phase is the stage at which a lifetime income arrangement actually delivers the income that the cost-of-income framework measures the cost of producing. The Longevity Standard framework evaluates the realized cash flow of any income-phase arrangement against the frictionless pool as the benchmark and solo drawdown as the baseline, with the structural characteristics of the claim — its risk sharing, adjustment mechanism, liquidity, and cost structure — determining how that cash flow is produced.
Related terms
- Accumulation phase
- Annuitization
- Annuity payment options
- Distribution phase
- Income rider
- Payout rate
- Systematic withdrawal