What are pro-rata withdrawals in annuities?

Pro-rata withdrawals in annuities refer to the method of distributing funds in a way that maintains the proportional balance of the investment accounts. This means that when withdrawals are made, they are taken from each sub-account of the annuity proportionally based on the account values at the time of the withdrawal.

This approach ensures that the overall investment balance reflects the same ratio of different investment options after withdrawals are made. For instance, if an annuity has a mix of equities and bonds and an investor decides to make a withdrawal, the withdrawal would be taken from both asset types in proportion to their current value in the overall portfolio.

Such a method is essential for investors who wish to maintain their original asset allocation and ensure that their investment strategy remains intact after making withdrawals. It promotes consistency and helps in managing risks effectively, especially in a fluctuating market.

Other choices do not accurately reflect what pro-rata means. Fixed percentage withdrawals imply a standardized amount that doesn't account for the underlying asset allocation, while equal withdrawals over time suggest a consistent amount is taken regardless of proportions, which can disrupt the intended investment balance. Withdrawals only permitted at retirement age do not pertain to the concept of pro-rata withdrawals at all.