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Deferred annuities feature an accumulation phase, during which funds may be deposited and balances grow tax-deferred, and a payout phase, when the funds are distributed. People who have not yet retired will generally purchase a deferred annuity. During the accumulation phase, the current interest rate in effect will be applied to the balance in the annuity and compounding of interest will take place.

Immediate annuities, as noted above, are appropriate for investors who need to begin receiving income immediately, and want a dependable stream of regular income. For these annuities, the payout phase begins immediately as "annuitization" takes place. The amount of the payment is based on age, gender, and the balance in the contract.