Accumulation Phase

Written By
Paul Tracy
Updated November 4, 2020

What is the Accumulation Phase?

Accumulation phase refers to the period of time (often several years or even decades) during which an annuitant (annuity policyholder) is making cash contributions to an annuity account. After the accumulation phase ends, the annuitization phase typically begins, whereby the annuitant receives payments for a certain period.

How Does the Accumulation Phase Work?

An annuity is a financial contract written by an insurance company that provides for a series of guaranteed payments, either for a specific period of time or for the lifetime of one or more individuals.

During the annuity's accumulation phase, the investor makes payments to the annuity company and can often make his or her own decisions about how to allocate those payments among a number of investments. Some annuities allow the investor to allocate money to fixed accounts, which pay a guaranteed minimum rate of interest. During the accumulation phase, the investor can usually transfer money from one investment to another without paying capital gains or income taxes on the proceeds (although there may be administrative charges for doing so).

For most annuities, investors can contribute as much as they want during the accumulation phase. However, the length of the accumulation phase varies. Immediate annuities, for example, involve one big payment (i.e., no real accumulation phase) and benefits begin soon after (often within one year of purchase). Deferred annuities, on the other hand, have longer accumulation phases, and their benefit payments begin at some future date. Interest usually accrues on a tax-deferred basis in the interim.

Money deposited into the annuity during an accumulation phase can usually be withdrawn during the accumulation phase, but once the investor begins receiving regular payments, most annuities do not allow additional withdrawals. A penalty usually applies if the investor withdraws the funds before he or she is older than 59 1/2 (these withdrawals may also trigger "surrender charges").

Why Does the Accumulation Phase Matter?

The accumulation phase has a tremendous effect on an investor's future income for several reasons. First, the more the investor puts into an annuity during the accumulation phase, the larger his or her annuity payments are later (and there are usually no limits on the amount of money an investor can place in an annuity, unlike IRAs). Secondly, the performance of the funds chosen by the investor during the accumulation phase affects how much the investor has when the payments begin. Also, you should know the length of the accumulation phase can determine how large your account grows. Annuities with longer accumulation phases have more time to grow their initial investments through appreciation and compounding, which leads to higher payments.

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