What a Federal Annuity Is and How It Works

A federal annuity is a retirement income stream paid by the U.S. government to certain federal employees and their survivors

A federal annuity is a monthly payment you receive after you retire from federal service. The amount depends on how long you worked for the federal government, your salary during that time, and which retirement system you were enrolled in. The government continues paying you for the rest of your life, and in some cases, continues paying your spouse or children after you die.

Federal annuities are different from Social Security, though you may receive both. They are also different from private annuities you might buy from an insurance company. A federal annuity is a pension — a defined benefit plan where the government promises to pay you a specific amount each month based on a formula, not based on how much you or your employer contributed or how well investments performed.

Key Takeaways

• Federal annuities are paid to people who worked for the federal government and met the age and service requirements for their specific retirement system.
• The amount you receive is calculated using a formula that includes your years of service, your highest average salary, and your age at retirement.
• You must separate from federal service before you can begin receiving an annuity, though some systems allow you to start collecting at different ages depending on your service length.
• Federal annuities are taxed as ordinary income, and you pay federal income tax on the full amount unless you made after-tax contributions.
• Your annuity may continue to your spouse or children after your death, depending on the survivor benefit option you chose when you retired.

Which federal employees are covered by a federal annuity

Federal employees hired before January 1, 1984, are covered under the Civil Service Retirement System (CSRS). Employees hired on or after that date are covered under the Federal Employees Retirement System (FERS). A small number of employees in specialized positions, such as certain law enforcement officers or members of Congress, may be covered under different systems with their own rules.

You must have worked for the federal government for a minimum period to receive an annuity. Under CSRS, you generally need 5 years of service. Under FERS, you also need 5 years of service, but the age at which you can start collecting varies. Military service that was creditable federal service may count toward your total, depending on when you served and which system covers you.

Not all federal employees are covered by these systems. Some federal employees participate in the Thrift Savings Plan (TSP), a defined contribution plan similar to a 401(k), instead of or in addition to a traditional annuity. TSP is not an annuity itself — it is an investment account — but FERS employees receive both a FERS annuity and access to TSP.

How the federal annuity amount is calculated

The formula for your annuity differs between CSRS and FERS. Under CSRS, your annuity is calculated as 1.5% of your high-3 average salary multiplied by your years of service. Your high-3 is the average of your highest three consecutive years of salary. If you worked 30 years, your annuity would be 45% of your high-3 salary (1.5% × 30 years).

Under FERS, the calculation is more complex because it is designed to work alongside Social Security. Your FERS annuity is 1% of your high-3 average salary multiplied by your years of service, up to age 62. After age 62, the calculation increases to 1.1% per year of service. This lower initial percentage reflects the fact that FERS employees also receive Social Security benefits at retirement.

Your high-3 salary includes your base pay but may also include certain bonuses, locality pay, and other forms of compensation, depending on what your agency counted as salary during those three years. It does not include leave payouts or other lump-sum payments made at separation.

When you can start receiving your federal annuity

The age and service requirements for receiving your annuity depend on which system covers you and when you were hired. Under CSRS, you can retire at age 55 with 30 years of service, at age 60 with 20 years of service, or at age 62 with 5 years of service. You receive your full calculated annuity at any of these points.

Under FERS, the rules are different. You can retire at your Minimum Retirement Age (MRA) with 30 years of service and receive your full annuity. Your MRA depends on your birth year and ranges from 55 to 57. You can also retire at age 62 with 5 years of service, or at age 60 with 20 years of service, though retiring before your MRA with fewer than 30 years of service results in a reduced annuity.

You must formally separate from federal service before your annuity begins. You cannot collect an annuity while still employed by the federal government, though there are limited exceptions for certain types of leave or part-time work.

Tax treatment of federal annuities

Your federal annuity is taxed as ordinary income. You pay federal income tax on the full amount you receive each month, and you may also owe state income tax depending on where you live. The Office of Personnel Management (OPM) does not withhold taxes automatically, so you must arrange withholding yourself or pay estimated taxes quarterly.

If you made after-tax contributions to your retirement system during your career — money you contributed that was not deducted from your taxable income — a portion of your annuity may be tax-free. The IRS uses a formula to determine what percentage of your annuity is a return of your after-tax contributions and what percentage is taxable income. You will receive a statement from OPM showing your after-tax contributions, if any.

Your federal annuity does not count as earned income for Social Security purposes, so it does not affect your Social Security benefits. However, if you are under full retirement age and earning other income, your Social Security benefits may be reduced by the earnings test.

Survivor benefits and what happens after you die

When you retire, you choose a survivor benefit option that determines whether your annuity continues to your family after your death. Under CSRS, you can elect a full annuity with no survivor benefit, a reduced annuity with a survivor benefit for your spouse, or a reduced annuity with a survivor benefit for your spouse and children. Under FERS, the options are similar but the reduction percentages differ.

If you choose a survivor benefit, your monthly annuity is reduced to account for the cost of that benefit. The reduction is permanent — you cannot change your election after your first annuity payment. Your spouse receives a percentage of your annuity (typically 50% or 75%, depending on the option you chose), and that payment continues for their lifetime unless they remarry before age 55.

If you die without electing a survivor benefit, your beneficiary receives a lump-sum payment equal to your after-tax contributions plus interest. This is usually much less than the total annuity you would have received had you lived longer.

Federal annuities compared to other retirement income sources

A federal annuity is a defined benefit — the government guarantees you a specific monthly amount for life. This is different from a defined contribution plan like the Thrift Savings Plan, where your retirement income depends on how much you and your employer contributed and how well your investments performed. FERS employees receive both: a defined benefit annuity plus access to TSP.

Federal annuities are also different from Social Security, which is a separate federal benefit based on your work history and age. You may receive both a federal annuity and Social Security if you worked long enough in federal service and in other covered employment. However, if you did not pay Social Security taxes during your federal service (which was the case for many CSRS employees), you may be subject to the Government Pension Offset, which reduces your Social Security spousal or survivor benefits.

Private annuities, which you can purchase from an insurance company, work similarly in that they provide may provide income for life. However, the amount depends on the price you pay, your age, and current interest rates, not on a government formula based on your salary and service.

Frequently Asked Questions

Can I receive my federal annuity if I leave federal service before reaching retirement age?

You cannot receive your annuity while you are still employed. If you separate before you meet the age and service requirements for your system, you have options: you can leave your contributions in the system and wait until you reach retirement age to claim your annuity, or you can withdraw your contributions as a lump sum. If you withdraw, you lose credit for that service.

What happens to my federal annuity if I move to another state?

Your federal annuity is not affected by where you live. You can move to any state or even outside the United States and continue to receive your annuity payments. However, you may owe state income tax on your annuity depending on your new state's tax laws, and some states do not tax federal pensions while others do.

Can I work part-time or as a contractor after I retire and still receive my annuity?

You can work for a non-federal employer and receive your full annuity. If you work for the federal government again, your annuity may be reduced or suspended depending on how much you earn and which system covers you. FERS has an earnings limit that applies for the first year after retirement; CSRS does not.

Is my federal annuity adjusted for inflation?

Yes. Federal annuities receive a cost-of-living adjustment (COLA) each year, usually in January. The adjustment is based on the Consumer Price Index and applies to both CSRS and FERS annuities. This means your monthly payment increases over time to keep pace with inflation.

What if I was married when I retired but am now divorced?

Your ex-spouse may have a claim to a portion of your annuity under federal law if your marriage lasted at least 10 years during your federal service. A court order (called a may have access to Domestic Relations Order, or QDRO) determines how much of your annuity goes to your ex-spouse. You should consult the court order and OPM to understand how this affects your payments.