Deferred Annuity

When you purchase an annuity, if you decide to start receiving payments within a year, you have an immediate annuity. Should you decide to wait to collect payments, you have a deferred annuity.

Deferred annuities allow your principal to increase before you begin to receive the stream of payments. Typically, annuities, such as qualified longevity annuity contracts, are bought for future retirement income.

You can pursue a strategy combining the advantages of immediate and deferred annuities by getting a split-funded annuity.

According to the LIMRA Secure Retirement Institute, deferred annuities are forecast to have the largest growth rates over the coming years.

Deferred annuities are also classified according to how you pay for them. You can make one payment or several. And if you make several payments, they can be structured in different ways.

Single premium deferred annuities are purchased with one sum of money.

There are advantages and disadvantages with single premium deferred annuities. For example, a single premium deferred annuity might tie up more of your money than you ultimately could afford to put into it, which could wind up costing you a surrender fee.

A flexible premium annuity is a type of deferred annuity that is purchased with a series of payments. These payments can be scheduled as specific amounts — known as scheduled premium deferred annuities — or they can change according to your plans or ability to pay.

A deferred annuity that allows you to adjust your payments in this way is known as a flexible premium deferred annuity.

There are two phases to a deferred annuity: The accumulation phase and the payout phase.

During the accumulation phase, you are making payments and your annuity is accumulating interest on a tax-deferred basis. How this accumulation occurs varies depending on the annuity type.

Regardless of the type of accumulation your deferred annuity uses, you don’t pay taxes on those earnings during the accumulation phase. Taxes are not due until you reach the payout phase. This is true for federal income taxes and any applicable state premium taxes.

Once an annuitant reaches the distribution phase of their contract, which typically begins when they reach the age of 59 and a half, they can receive payouts from the annuity in one of three ways.

If you die during the accumulation period, a deferred annuity includes a basic death benefit that pays some or all of the value of the annuity to your beneficiaries. If you die during the payout phase, your beneficiaries may not receive anything unless you have a specific provision in your annuity contract providing for your beneficiaries to be paid.

As with any investment, deferred annuities carry several benefits and risks.

A deferred annuity makes sense for people nearing retirement or for younger investors who have maxed out their retirement plans but still want to put money into tax-deferred retirement income.

Typically, annuity buyers are in their 60s. They’ve accumulated a significant amount of retirement savings and can roll that money over into an annuity without suffering a financial penalty.

A deferred annuity allows you to continue working while money accumulates in the annuity, providing a guaranteed lifetime income stream when you finally retire.

At the same time, a deferred annuity limits your ability to repurpose your retirement savings — and can be difficult to reverse if you change your mind. You will have to wait for your annuity income with a deferred annuity. If you want or need the income from your annuity within a year, you may want to consider an immediate annuity instead.