The Two-Tiered Annuity: A Flawed Retirement Plan

Shawn Plummer

CEO, The Annuity Expert

Two-Tiered contracts were a hybrid annuity product type that combined a deferred annuity with an income annuity. A Two-Tier Annuity was a deferred annuity product that required owners to annuitize their retirement plan rather than walking away with their accumulation value in a single lump sum. These old-school retirement annuities are rare in today’s annuity industry, but maybe you’ve purchased a two-tier annuity in the past.

Typically an annuity owner can surrender a two-tiered annuity, but there’s a huge surrender charge that you’ll incur. In addition, you might lose money in the process. You could sell the annuity on the Secondary Market as well. This guide will explain what you need to know.

What Are Two-Tier Annuities

Two-tier annuities are deferred fixed annuities that allow annuity owners access to their cash value only through annuitization. Two-Tier annuities can be either a fixed annuity or a fixed indexed annuity.

How Do Two-Tier Annuities Work?

The annuity contract owner keeps the annuity contract in force for a set number of years before opting to withdraw funds as an annuitized payment. There is no lump-sum

Cashing In A Two-Tier Annuity

When the two-tier annuity contract is cashed out in a single sum or when the contract owner takes withdrawals, the interest credited to the contract or the withdrawn funds is re-calculated from the annuity’s issue date. A lower, non-competitive level of interest is used in the reevaluation instead of the higher tier of interest rates.


The main benefit of a two-tier deferred annuity is the higher interest rates that it typically offers compared to similarly structured annuities that aren’t two-tier.


The drawbacks of a two-tier annuity include the following:

  • A reduction in liquidity compared to other deferred annuities
  • the contract owner being locked into the two-tier annuity, only able to get out of it by taking a reduction in cash value or electing the annuity settlement option 

Two-Tiered Annuity Contracts Can Be

Two-Tiered Annuity Structure

Two-Tiered Annuities require an annuity owner to defer their contract for a specified period of time and then convert your annuity contract’s value into an irrevocable stream of annuity payments.

Example:  Let’s say your two-tier annuity contract is a 5×10 annuity.  This means the two-tier contract requires the annuity to be deferred (grow) at a minimum of 5 years. Suppose the client wants access to the annuity after five years. In that case, they must convert the deferred annuity into an income annuity at a minimum income distribution period of at least ten years.

Let me say the minimum requirements another way.  

If you buy a 5×10 two-tiered annuity, the minimum period of time you’ll be in the contract is at least 15 years (5 years of growing the contract then taking an annuity payout of 10 years).

Two-Tiered Annuity Pros

The two-tiered annuity contracts generally have higher annuity payout amounts for retirement income planning than an immediate annuity or deferred annuity.

You probably were offered a nice premium bonus to entice you.

Typically, these retirement annuities offered better growth or a higher guaranteed interest rate simply because you would be stuck in the contract for a long time.

At least you get a higher rate of return with your “cemented” annuity.

You don’t necessarily have to convert your future retirement dollars into a guaranteed lifetime income, but rather a fixed period of time instead.

Two-Tiered Annuity Cons

Normally you don’t know your retirement income payment amounts because these retirement annuities were mostly performance-based (indexed products) that earned gains versus the guaranteed income riders of modern annuities.

Contracts have limited liquidity (penalty-free withdrawals) during the accumulation phase, if any at all. Therefore, there would be no liquidity in the income phase.

Annuity owners were forced to convert their accumulated value into periodic payments for a fixed period of time.

If you could surrender your contract, the surrender charges would be extremely high, and you’d lose a significant amount in your accumulation value.

Finally, if you chose a life contingent payout (single life or joint and survivor), beneficiaries could have had zero death benefit.


Two Tier contracts are dated retirement annuities built for future retirement income and gave the annuity industry a bad name for a period of time.

The good news is there aren’t many (if any) of these types of annuities available to purchase today

However, a Deferred Income Annuity (DIA) has very similar attributes.

Fixed index annuities today don’t necessarily force you to convert your retirement savings into a fixed income stream. However, these enhanced benefits are probably why you purchased the annuity in the first place.

The annuity world created the Guaranteed Lifetime Withdrawal Benefit, the income rider, to make today’s annuities (index annuity, variable annuity, fixed annuity) more flexible.

If you have a two-tiered annuity contract and need advice on liquidating, transferring, or walking away from your annuity contract, contact us.

What Is A Two-Tiered Annuity?

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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