What Is a Delayed Annuity?

A delayed annuity is an annuity in which the first payment is not paid immediately, as in an immediate annuity. A delayed annuity, more commonly known as a deferred annuity, is a type of life annuity that guarantees a reliable stream of cash payments to an annuitant until death. Following the death of the annuitant, the cash benefit may be transferred to a beneficiary or estate depending on the options chosen by the buyer.

Delayed annuities differ from most annuities in how premiums are paid into them, and how and when withdrawals are made. Delayed annuities may be funded via monthly contributions or a lump-sum payment. Either way, withdrawals do not occur directly after funding, as with an immediate annuity. In some cases, a delayed annuity may be used as a method of parking money for future use with the benefit of an annuity's tax treatment.

Key Takeaways

  • A delayed annuity is an annuity in which the first payment is not paid immediately, as in an immediate annuity.
  • A delayed annuity—also known as a deferred annuity—is a type of life annuity that guarantees a reliable stream of cash payments to an annuitant until death.
  • Following the death of the annuitant, the cash benefit may be transferred to a beneficiary or estate depending on the options chosen by the buyer.
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What Is An Annuity?

Understanding a Delayed Annuity

A delayed annuity grows during the accumulation phase (also known as the deferral phase) and pays out benefits in the distribution phase. Some delayed or deferred annuities allow for a single premium payment that will grow during the accumulation phase (a single-premium deferred annuity). In a flexible-premium deferred annuity, an annuity buyer may make additional payments during the accumulation phase after making an initial premium payment. 

A delayed 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 Money may be withdrawn as needed, in a lump-sum payment, or transferred to another account or annuity.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 delayed annuity is used this way, the annuity buyer retains control of the money, rather than being locked into payments by initiating a withdrawal in a distribution or annuitization phase.

Delayed Annuity Types

Delayed annuities can come in a variety of types depending on the needs of the buyer.

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 the guaranteed interest rate that 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. The product acts like longevity insurance in that payments may not start until the retiree's other assets are spent down.

Rule Changes for Retirement Accounts Starting in 2020

Although delayed annuities allow the cash payments to be transferred to a beneficiary following the death of the annuity owner, new rules went into effect in 2020 for retirement accounts.

With the passage of the SECURE Act by the U.S. Congress in 2019, the stretch provision, which allowed non-spousal beneficiaries to take only the required minimum distributions from an inherited IRA, was eliminated. Under the new ruling, non-spousal beneficiaries who inherit an IRA account must withdraw 100% of the funds within 10 years following the death of the owner. Retirement accounts that have annuities in them would also need to be cashed out within 10 years of the owner's death under the ruling.

The good news is that if you have an annuity in your employer-sponsored retirement plan, such as a 401(k), the new ruling lets you move the 401(k) annuity to your new employer's plan if you change jobs. However, the new law eliminated some of the legal risks for insurance companies and annuity providers by reducing the ability of account holders to sue them if they can't honor the annuity payments.

Please note that there are other rules that went into effect as a result of the SECURE Act that are not mentioned here. It's important to consult a financial professional to review the changes to retirement accounts and make the necessary adjustments to your long-term financial plan.

Example of a Delayed Annuity

If Steve were to fund an annuity with a premium payment and receive five yearly payments of $1,000 at the end of each year starting this year, then this payout would be considered an ordinary annuity.

On the other hand, if the five payments are deferred for 10 years, this instrument is classified as a delayed annuity. In order to determine the net present value of the delayed annuity, the payments must be discounted to year zero (the present). In other words, the present value of an annuity refers to the amount of money that would be needed today to fund a series of future annuity payments.