What Is a Deferred Payment Annuity?
A deferred payment annuity is an insurance product that provides future payments to the buyer rather than an immediate stream of income. An annuity is a financial contract that allows the buyer to make a lump-sum payment, or a series of payments, in exchange for receiving future periodic disbursements. A deferred payment annuity allows the investment, known as the premium, to grow both by contributions and interest before payments are initiated. A deferred payment annuity is also known as a "deferred annuity" or a "delayed annuity."
What Are Deferred Annuities?
How a Deferred Payment Annuity Works
Deferred payment annuities differ from most other annuities in the ways premiums are paid in and how and when withdrawals are made. A deferred payment annuity may be funded over time via monthly contributions or all at once, possibly even decades before payments start. Withdrawals do not begin soon after it is funded, as with an immediate annuity.
A deferred payment annuity grows during the accumulation (or deferral) phase and dispenses benefits payments in the distribution (or income) phase. A deferred payment annuity can be variable or fixed.
Deferred payment annuities typically offer tax-deferred growth at a fixed or variable rate of return, just like regular annuities. Earnings are taxed as ordinary income upon withdrawal or annuitization. Deferred payment annuities may be purchased for minor children who will begin receiving benefits payments when they reach age 18 or another age specified by the annuity buyer.
A deferred payment annuity buyer need not ever turn the money in the annuity into a series of income payments. Money may be withdrawn as needed, in a lump-sum payment, or transferred to another account or annuity. When a deferred payment annuity is used this way, the annuity buyer retains control of their money, rather than being locked into payments by initiating a withdrawal in a distribution or annuitization phase.
Deferred Payment Annuity Types
There are a number of types of deferred payment annuities:
- A fixed delayed annuity (more commonly known as a fixed deferred annuity) is similar in function to a certificate of deposit, except that the tax on interest is deferred until withdrawal. Typically, the annuity writer will specify what guaranteed interest rate the annuity will pay.
- A variable delayed annuity (more commonly known as a variable deferred annuity) is similar to buying mutual funds in that returns will depend on the performance of a group of sub-accounts. Such annuities can be both riskier and more expensive.
- A longevity annuity works like a normal life annuity but tends to start much later than the typical retirement age. It acts like longevity insurance in that payments may not start until a retiree's other assets are spent down.