What is an annuity?
An annuity is defined as a ‘fixed sum of money paid to someone each year, typically for the rest of their life’. For the big multi-state games in America such as Powerball and Mega Millions, the annuity option refers to 30 annual payments, where jackpot winners can receive a portion of their winnings each year for three decades.
Why is the cash option not as much as the annuity?
The cash value represents the money available at the time the jackpot is won, whereas the annuity takes into account the interest that would accrue over time.
The choice for winners is whether to take the full jackpot amount as an annuity or the smaller cash lump sum. The New Jersey player who won $533 million in last week’s Mega Millions, for example, will only receive that much if they opt for the annuity. The cash value of the jackpot is $324.6 million.
Why do winners mostly choose cash?
The cash option is popular because it gives your bank account an immediate boost and you do not have to wait to make any big purchases. It has even been argued that you can earn more than the annuity amount over time by investing the cash sum, although winners should always consult expert financial advisers. The idea of planning for regular payments over 30 years or longer may not be attractive or practical, especially for older players.
The advantages of annuity
Various other games around the world offer players the chance to receive payments even more regularly than once a year. In Australia’s Set For Life, the top prize is AU$20,000 a month for 20 years, while Cash4Life winners in America are paid $1,000 per day for life.
Canadian teenager Charlie Lagarde recently hit the headlines after winning the top prize in the Loto-Quebec game Gagnant a vie (Winner for Life). It was the first ticket she had ever bought and it came on her 18th birthday.
Charlie had the choice of a CA$1 million lump sum or CA$1,000 a week for life, and opted for the weekly payment. As well as having guaranteed financial security for the rest of her life, the youngster stands to receive far more than CA$1 million. She will pass that figure in a little over 19 years, and if she lives into her 80s she will collect more than CA$3 million in total over her lifetime.
The UK National Lottery suggested last November that an annuity-style game may be launched at some point in the future, and other operators around the world could also follow suit. Meanwhile, fans of Mega Millions and Powerball can take part in the next big draws this weekend and hopefully leave themselves in a position to choose between cash and annuity.