There are two phases in an annuity: the accumulation phase and payout phase. The accumulation phase is the time between initial purchase and annuitization. Annuitization begins when the annuity enters the payout phase.
Technically speaking, the accumulation phase occurs when a person is making regular contributions to a deferred annuity. This is the phase in which a policyholder is building up his or her savings and increasing the value of the annuity with the intention of having a larger accumulated sum for retirement. The accumulation phase ends when payments begin.
During the accumulation period of the annuity, withdrawals are subjected to a 10% federal income tax penalty if taken before age 59½. Also, depending on the annuity, only a certain amount (typically 10%) can be withdrawn each year without penalty by the issuing insurance company. These penalties allow annuity issuers to offer more competitive interest rates and are charged to discourage policyholders from making such withdrawals.
The accumulation period is usually followed by the annuitization phase. During the annuitization phase, guaranteed payments are received by the annuitant for a specified period of time, or for the remainder of his or her life. With a deferred annuity, the larger your contribution and the longer the accumulation period is, the greater your income stream will be once you begin the annuitization phase.