Deferred Annuities

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 or at some point in the future, 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 also 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.

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.

If you have a contract for a fixed annuity, your financial investment will accrue interest at a fixed rate that will not drop below a minimum, guaranteed by the issuing company.

Variable annuity contracts allow insurers to invest your premiums in mutual funds that comprise stocks, bonds and other short-term money market products called “subaccounts.” Your rate of return depends on the performance of your subaccounts.

Indexed annuities are tied to the performance of stock-market measurements, including Standard & Poor’s index of 500 stocks, commonly known as the S&P 500. Your contract guarantees a minimum interest rate — even if the performance of the stock market index declines.

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.

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.

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.

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 in one payment.

Unlike premiums for immediate annuities, which must be paid in one installment, premiums for deferred annuities can be spread over time in a series of payments.

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 — what’s 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.

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.

In a lump-sum disbursement, an annuity is distributed as a one-time, taxable single payment.

When funds are dispersed via systematic withdrawal, the annuity can be withdrawn or disbursed through periodic taxable payments. Any remaining money continues to earn interest until the account has been depleted.

Under an annuitization distribution plan, an annuitant receives monthly, quarterly or yearly payments for a designated amount of time, until the annuitant’s death or until the annuitant’s spouse dies.

As with any investment, deferred annuities carry a number of benefits and risks.