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. 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 amongst annuity types in 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.

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 vehicles.

Typically, annuity buyers are in their 60s. They’ve accumulated a significant amount of retirement savings and can roll that money over into annuity products without triggering adverse tax events.

If you are a younger investor, a deferred annuity allows you to accumulate wealth as you work. Then, in retirement, you can achieve a guaranteed lifetime income stream.

However, a deferred annuity limits your ability to repurpose your retirement savings — and can be very difficult to reverse if you change your mind. You will have to wait for your annuity income, with a deferred annuity. If you need more near-term liquidity, , you may want to consider an immediate annuity .

Deferred annuities come in a few different varieties, each with different features and benefits. The most common types of deferred annuities are single premium deferred annuities and flexible premium deferred annuities.

Single premium deferred annuities are purchased with one lump 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 be adjustable. When the payments are adjustable, the vehicle is commonly referred to as a flexible premium deferred annuity.

“A deferred annuity is an annuity that allows you to delay receiving payments until a later date,” said Linda Chavez, a licensed insurance agent. During the deferral period, which is known as the accumulation phase, the annuity contract earns interest and increases in value.

An immediate annuity is structured differently. This type of annuity contract does not have an accumulation phase. Immediate annuities undergo annuitization as soon as the contract is signed, which means the income payments can begin immediately. That said, many immediate annuity owners elect to initiate the payment stream up to a year after purchase.

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

During the accumulation phase, the annuity accumulates interest on a tax-deferred basis. During the payout phase, the annuity distributes income.

The accumulation phase works differently, 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 annuitants reach the distribution phase of their contract, which typically begins when they reach the age of 59½, 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.