A deferred annuity is a type of annuity contract that allows you to accumulate funds over time before receiving income payments.
Unlike immediate annuities, which start providing income shortly after the premium payment, deferred annuities have a “deferral period” during which your investment grows tax-deferred.
Here’s how a deferred annuity works:
- Premium Payment: You make either a lump-sum payment or a series of payments into the deferred annuity, known as the premium.
- Accumulation Phase: During the accumulation phase, your premium is invested by the insurance company in various investment options, such as fixed-income investments, stocks, bonds, or mutual funds. The earnings on your investment grow tax-deferred, meaning you won’t pay taxes on the gains until you start receiving income from the annuity.
- Growth of Funds: Over time, your investment grows based on the performance of the underlying investments. The rate of growth depends on factors such as the investment options chosen, market conditions, and any guaranteed interest rates specified in the annuity contract.
- Payout Phase: At a later date, typically during retirement, you can choose to start receiving income payments from the deferred annuity. The income payments can be structured as a lump sum, periodic payments for a specified period, or for life, depending on the payout option you select.
Deferred annuities offer several benefits, including:
- Tax-Deferred Growth: During the accumulation phase, your investment grows tax-deferred, allowing your money to compound faster compared to taxable investments.
- Flexibility: Deferred annuities provide flexibility in how you receive income payments, allowing you to choose the timing and structure of payouts based on your retirement needs.
- Guaranteed Income Options: Some deferred annuities offer optional riders or features that guarantee a minimum income stream for life, providing financial security and protection against longevity risk.
- Estate Planning Benefits: Deferred annuities can be used as part of your estate planning strategy to transfer wealth to your beneficiaries, potentially bypassing the probate process and reducing estate taxes.
Overall, deferred annuities can be a valuable tool for long-term retirement planning, offering tax advantages, flexibility, and potential for guaranteed income in retirement.
