A deferred annuity is a long-term investment of a sum of money. In a deferred annuity, you start receiving payments several years accordingly after the initial sum has accumulated in regular amounts. A deferred annuity promises to pay the annuitant a regular income as decided by the buyer.
Talking about return, the income phase begins as soon as you start receiving your first payment from your annuity. Every annuity is customizable. You can choose how and from when you would like to receive payments, precisely in your investment period. You can also opt to start receiving everything at once. Or maybe to receive a set amount periodically until the annuity runs out of funds. Or prefer to annuitize the fund to receive payments until you die. These choices are an addendum to the pros of deferred annuities.
Deferred annuity deals usually include a death benefit. If you pass away before disbursement is yet to start, a beneficiary of yours will receive the remaining funds. These funds will still be taxed as ordinary income upon leaving the annuity regardless of it.
Types of a deferred annuity
Deferred annuities are of three types respective to the computation of the rate of return is computed. Namely, fixed, indexed, and variable annuity.
Fixed annuities contracts a specific and guaranteed rate of return on the money in the account. Its features make it the most stable option among the three. It has a lower return as the interest rate. The interest rates are determined at the time of the purchase.
Indexed annuities provide a return based on the performance of a particular market index. It is the most complex of all the deferred annuity options available. Unlike the fixed option, you don’t have any minimum interest rate guarantee, making it ambiguous about the return on investment. Here, the performance of a market index determines the interest rates. These reasons indexed annuities often hold several stipulations that may limit your return.
Variable annuities hold the highest potential for the substantially increased return amount. Nevertheless, there is also a risk of poor performance. Here, the annuitant can opt from a dozen or more stocks, bonds or other market or mutual funds. The returns on variable annuities are dependent on the performance of funds, or sub-accounts, chosen by the annuity owner. The returns on investment are considerably good. The annuitant can determine the interest rate based on its performance.
In all the three types, the major similarity is that the annuitants have to pay taxes while withdrawing.
Deferred annuity vs Immediate annuity
The basic line of difference in both the annuities is just about when the distribution phase of the annuity begins. Deferred annuities and immediate annuities are straightforward as the prefixes suggest. Immediate annuities begin paying out returns immediately. Whereas, deferred annuities stay untouched till any withdrawals or disbursements start according to your tenure.
Unlike an immediate annuity, starting payments immediately, annuitants exercise the liberty to perpetually delay payments from a deferred annuity. While purchasing a deferred annuity, you should account for the fact that you aren’t seeing your money back for several years. The earnings are taxed with an interest rate as per the customization chosen. On the contrary, immediate annuities start paying right away without deferring.
The similarity is both allow unlimited contributions. Both provide a continuous stream of payments for life according to the annuitant’s choice regardless of the type of annuity.
The takeaway
Young adults or people several years away from retirement, a deferred annuity suits perfectly to your needs. A thorough understanding of the details of any surrender period or death benefit is a must. Familiarizing yourself with all conditions is another key notation.
