Deferred Annuity

Definition

A deferred annuity is a type of annuity contract where the annuitant defers the start of annuity payments to a future date, allowing the invested funds to grow tax-deferred until the specified retirement age or income need arises.

5 Must Know Facts For Your Next Test

1. Deferred annuities allow for tax-deferred growth of the invested funds, which can lead to a larger account balance at the time of retirement or income need.
2. Deferred annuities can be funded with either a single lump-sum payment or a series of periodic contributions, providing flexibility in the accumulation phase.
3. Deferred annuities offer a guaranteed income stream for life or a specified period, providing retirees with a reliable source of retirement income.
4. The deferral period for a deferred annuity can range from a few years to several decades, depending on the annuitant's investment horizon and retirement goals.
5. Deferred annuities may be subject to withdrawal penalties or surrender charges if the annuitant accesses the funds before the specified retirement age or income need.

Review Questions

• Explain the key difference between a deferred annuity and an immediate annuity.
  • The primary difference between a deferred annuity and an immediate annuity is the timing of when the annuity payments begin. With a deferred annuity, the annuitant defers the start of annuity payments to a future date, allowing the invested funds to grow tax-deferred until the specified retirement age or income need arises. In contrast, an immediate annuity begins making payments immediately after the initial investment, without a deferral period.
• Describe the role of tax-deferred growth in the context of a deferred annuity.
  • Tax-deferred growth is a crucial feature of deferred annuities. By deferring the taxation of the invested funds until withdrawal, the annuitant's account balance can grow significantly larger than it would in a taxable investment account. This tax-deferred growth allows the annuitant to accumulate more wealth over time, leading to potentially higher future annuity payments or a larger lump-sum withdrawal at the time of retirement or income need.
• Analyze the potential advantages and disadvantages of a deferred annuity compared to other retirement savings vehicles.
  • The primary advantage of a deferred annuity is the tax-deferred growth of the invested funds, which can lead to a larger account balance at the time of retirement or income need. Additionally, deferred annuities offer a guaranteed income stream for life or a specified period, providing retirees with a reliable source of retirement income. However, deferred annuities may be subject to withdrawal penalties or surrender charges if the annuitant accesses the funds before the specified retirement age or income need, and the fees associated with annuities can be higher than those of other retirement savings vehicles, such as 401(k) plans or individual retirement accounts (IRAs).

Related terms

Immediate Annuity: An immediate annuity is an annuity contract where the annuitant begins receiving payments immediately after the initial investment, rather than deferring the payments to a future date.

Annuitization: Annuitization is the process of converting a lump-sum investment or a series of contributions into a stream of periodic payments, either for a fixed period or for the lifetime of the annuitant.

Tax-Deferred Growth: Tax-deferred growth refers to the ability of an investment to grow without being subject to annual income taxes, allowing the full amount to compound over time until withdrawal.