Annuities are so complicated that most people understand very little about them -- and some unscrupulous "financial professionals" cash in on that fact by selling them annuities that (1) are completely inappropriate for them and/or (2) have very high expenses that are not exactly emphasized by the people selling them.
Annuities are sold by insurance companies, which usually charge substantial fees for administration and certain "guarantees," which vary widely. These expenses are typically in the range of 2% to 3% annually. (The Wall Street Journal provides a weekly summary of various annuities, their performance and annual expense ratios, I believe on Mondays.)
The only two companies that I know charge annual fees less than 1% are TIAA-CREF and Vanguard. (Since Vanguard is not an insurance company, its annuities are actually administered by a company called People's Benefit Life Insurance).
The only feature of annuities that justifies their high expense ratios is the fact that the taxes on their earnings are deferred (similar to a conventional IRA). Thus, if you are in a high tax bracket and are contributing your legal maximum to a 401(k), Roth IRA, etc., you can place more money into tax-deferred status by investing it in an annuity.
While the annuity is growing (and no money is being withdrawn) it is said to be in the "accumulation phase." A "fixed" annuity provides a specified "fixed" rate of return for a specified number of years, whereas a "variable" annuity provides an investment in stock or bond "sub-accounts" (funds) of the owner's choice. The value of the variable annuity then varies according to returns of the underlying securities (minus expenses).
An annuity that is paying out money to its owner (or their beneficiary) is said to be in the "distribution phase." A person may, in fact, purchase an "immediate annuity" for a lump sum of money, which is called that because it immediately begins making periodic payments.
As far as I know, all annuities that are offered with an "accumulation phase" may be converted to "immediate annuities" managed by the same company whenever desired by the owner. I believe that the only time that the "1035 exchange" mentioned by Jackalope applies is when a person switches money from one company's annuity into another's. "1035" is an IRS rule that allows this transfer to be made free of taxes. (I made such a transfer myself into a TIAA-CREF annuity when I realized how much I was paying in annual expenses to another insurance company.)
Having money paid out from an annuity may be done similar to any other retirement account, whereby a certain percentage of the "units" (shares) are liquidated and paid out annually.
A unique and important option, however, is to receive periodic payments of a specified cash value for life -- however long that turns out to be. The major disadvantage to this arrangement is that if you die soon, your heirs don't get what you spent on the annuity. Conversely, if you live long, inflation may drastically reduce the purchasing power of the payments that you receive, since they are not inflation-adjusted.
A lesser disadvantage is that the inherent "return" on the money invested in the annuity (based on average life expectancy) is rather modest -- I figure about 4%.
Right now, my annuity with TIAA-CREF is in the accumulation phase and it is mostly in the inflation-indexed (TIPs) sub-account. When I eventually start withdrawing funds, I think that I'll keep most of the money there rather than take the option of guaranteed fixed payments for life. That will provide both inflation protection and a lump sum for my heirs if I die soon.
