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Deferred Annuity - AnnuitySchool.org

Deferred Annuity

Deferred annuities are good for those who want a guaranteed stream of income at a future date and wish to have their money to grow tax deferred while they wait.  The annuitant (or annuity owner) sets up the annuity expecting to receive regular payments or distributions from the annuity at some point in the future. Deferred annuities pay no tax on the earnings in the annuity until the annuitant starts to receive regular payments.

Deferred Annuity Summary

  • Contract owner receives a defined amount of income on a regular schedule for a set amount of time, often for life.
  • Can be purchased with a single lump-sum payment or periodic payments.
  • Contract owner determines how long the length of the accumulation period and when income payments begin
  • Are good to include in retirement planning portfolio.
  • Total sales of deferred annuities were $205 billion in 2010.

How they differ from immediate annuities

The most important way in which deferred annuities differ from immediate annuities is the timing of the first payment. Immediate annuities start making regular payments soon after the annuity is set up. In many cases, retirees set up immediate annuities to get steady monthly payments as soon as possible. Deferred annuities provide steady income for the annuitant after age 59 ½. With an immediate annuity the owner has to make one large payment to set up the account. With deferred annuities the owner makes multiple deposits into the annuity over the course on many years.

How do deferred annuities work

Deferred annuities begin with a contract and a deposit of an initial premium. The amount paid into the annuity doesn’t have to be large because the annuitant makes regular deposits into the annuity for many years. This period of time is called the accumulation period. The money is invested in any number of financial products such as mutual funds, stocks or bonds. Over the time the value of the annuity increases. This growth is tax deferred (link) so the annuity owner never needs to pay taxes on his earnings during the accumulation period. At a predetermined date (usually after retirement) the annuitant starts to receive regular payments. The annuitant now pays taxes on the earnings. The tax rate is often lower after retirement because the annuitant has less income.

Deferred Annuity Sales 2010

Deferred Annuity Sales 2010

Who are deferred annuities for

Deferred annuities are best for those who want a long term investment with guaranteed income. Although many people have retirement plans such as IRAs (individual retirement accounts) or 401(k) company retirement plan, the IRS imposes limits on how much money you contribute to these plans. If you reach the maximum allowed contributions with the IRA or 401(k) plans, then a deferred annuity gives you the opportunity to save more money for retirement. Most deferred annuity owners are in a high tax bracket, and want to reduce tax liability by putting a portion of their money into a deferred annuity. Once a person retires he receives regular income from his retirement plans, including his annuity.

Top 5 things to consider when decided to purchase a deferred annuity

  1. Stability of the financial firm: According to “Forbes: magazine, “No American company has ever defaulted on an annuity payment.” Still it is a good idea to use a financial company with high credit scores to manage your deferred annuity. Partnering with only financially stable companies will reduce worry and stress about your money.
  2. Fixed or Variable: After deciding on a deferred annuity, you then have the option of a fixed annuity or a variable annuity. Both types provide a minimum monthly payment. With fixed annuities the payment stays the same. With variable annuities the amount changes to reflect the movement of the underlying investments such as mutual fund or bonds.
  3. Fees: All annuities have fees and charges. With a fixed annuity there are no management fees or sales fees. When you buy a variable annuity, there are not only management fees but a fee called “”mortality and expense.” Shop around to find deferred annuities with the lowest fees and charges.
  4. InflationWith fixed deferred annuities you need to consider inflation. If inflation climbs too high it can eat into your earnings. One way to prevent this is to add a feature to the annuity that allows for annual cost-of living adjustments.
  5. Heirs: In many cases, if you purchase an annuity from an insurance company, the company claims the undistributed money in the account. If you want the funds to pass on to heirs after your death, you must purchase a deferred annuity that specifically grants the payments to a beneficiary.

When it comes to any type of annuity, you must understand the complexities for it to be a good investment for your needs. Deferred annuities offer advantages to high-income individuals who want to save money on taxes and save money for the future.