Deferred Annuity - Definition of a Deferred Annuity
A deferred annuity is an annuity that does not start making payments immediately. Most people who use deferred annuities either:
- Contribute to the account over time (making monthly contributions, for example), or
- Leave their money in the account (with the hope that it will grow over time)
The word deferred means that you’ll defer (or delay) taking payments from the contract. Contrast a deferred annuity with an immediate annuity: an immediate annuity will start making payments (almost) immediately after you purchase and fund the annuity.
If you start taking payments from an immediate annuity, it’s difficult or impossible to stop the process and get your money back.
In other words, with a deferred annuity you wait – possibly forever – to annuitize the contract (whether you opt for lifetime payments or some other arrangement).
Note: please read the important information at the end of this page.
When you use a deferred annuity, you don't necessarily ever have to turn the money into a systematic stream of income. Instead, you can simply make withdrawals as needed, take it all out in one lump-sum, or transfer the assets to a different annuity or account. Ultimately, a deferred annuity allows you to keep control over the money and keep your options open instead of irrevocably handing everything over to the insurance company.
When used in that way, a deferred annuity is basically an account that happens to have some of the features of an annuity: certain tax characteristics, and perhaps some guarantees made by an insurance company (including the possibility of a death benefit).
The term annuity refers to a series of payments – and traditionally they’ve been used to provide lifetime income (for retirees, for example). If you eventually decide to annuitize, you’ll select a payment option from your insurance company’s list of options. For example, you might choose to have income paid out over your lifetime only, or you might choose to have the income continue for the longer of your lifetime or your spouse’s lifetime.
For more details on payment options, learn about annuitizing.
Do not confuse the timing of payments from a deferred annuity with tax deferral, which is another feature available from annuities. With tax deferral, you don’t pay taxes on income inside of the annuity every year as the income is added to the account. Instead, you pay tax when the earnings are removed from a tax-deferred account. Ideally, this allows you to benefit from compounding: you keep more money in the contract, reinvest your earnings, and earn more on top of those earnings.
The tax deferral concept is similar to the idea of a deferred annuity: in both cases you're putting something off for later (whether it's when you receive income from an annuity or when you pay taxes).
Speak with a tax advisor or CPA to determine the consequences of using annuities and making withdrawals or transfers before you do anything. This article is just a basic definition and is not sufficient to help you understand complex insurance products (and even more complex tax laws). Any guarantees are only as strong as the insurance company making the guarantee and it is possible to lose money – consult with a local licensed insurance agent for more details.