Deferred annuities allow annuitants to delay their income disbursement payments. Delaying the annuitization phase allows annuity owners to contribute more to their investment over time.
A deferred annuity is a type of annuity contract that delays the annuitization phase — or period in which the annuity investment is converted into a series of income payments.
An annuity is a reliable financial tool many use to secure their financial future. Many people looking to invest in their retirement use annuities because of the myriad of benefits they provide, such as tax-deferred growth and an additional revenue stream beyond Social Security.
There are two main types of annuities — deferred and immediate. Unlike immediate annuity contracts that disburse income payments immediately after purchase, deferred annuities delay income payments. This delay allows annuitants to gradually contribute to their accounts. It also allows for their investment to grow over time and benefit from compounding interest.
How Do Deferred Annuities Work?
Deferred annuities do not disburse income payments immediately. When you buy a deferred annuity, either through a single-premium payment or periodic payments, income savings are disbursed at a later date.
Deferred annuities are designed to supply annuitants with lifetime payments, or to carry over through a spouse’s lifetime after an annuitant’s death. Deferred annuities may be ideal investments for younger people or couples far off from retirement.
Deferred annuity contracts provide more control than an immediate annuity over the money invested. For example, deferred annuity owners can choose to receive periodic withdrawals, the entire investment as a one-time lump sum or transfer all assets to another account when their account reaches the annuitization phase.
All annuities are tax-deferred investments, meaning as the account earns interest, the annuitant is not immediately taxed on the growth. Instead, these earnings are taxed once they are withdrawn or annuitized. Fixed deferred annuities have a permanent rate of interest, and the option to include a death benefit rider. This rider, a component added onto an annuity, ensures all remaining assets are transferred to a beneficiary upon the annuitant’s death, preventing the investment from being forfeited to the issuing insurance company.
Fixed Deferred Annuity vs. Variable Deferred Annuity
There are two main types of deferred annuities: fixed annuities and variable annuities. While both options guarantee an income payout, the amount disbursed may differ depending on interest accrued over time.
A fixed deferred annuity guarantees the monthly, quarterly or yearly payments an annuity owner receives is consistent. During the accumulation phase — the period when the annuitant is building cash value for their annuity account — a fixed deferred annuity earns interest at a set rate of return. Consistent income payments are then disbursed and do not fluctuate every pay period.
Variable deferred annuity premium payments are invested into sub-accounts, and may accrue interest based on the performance of the financial market. This deferred annuity option carries a level of financial risk. Because funds are invested in stocks or mutual fund sub-accounts, the premium amount of the annuity may increase or decrease. This can cause the disbursement amount to fluctuate per pay period.
Deferred Annuity Pros and Cons
When choosing to invest in an annuity, it is important to weigh the benefits against the risks to ensure you receive the most bang for your buck. Deferred annuities offer a number of benefits, including:
Guaranteed Payout
Deferred annuities guarantee an additional income stream over the course of the annuity contract or until the annuitant’s death. This annuity option also offers a death benefit component, ensuring a beneficiary receives any remaining assets left after an annuitant’s death.
Tax-Deferral
Deferred annuities experience growth tax-free. Any interest accrued over time is not taxed until investment savings are disbursed.
Growth Potential
Variable deferred annuities do not have a set interest rate because they are invested in sub-accounts. All the interest accrued depends on the success of the financial market. This provides ample growth potential and can also increase the amount disbursed within the annuitization phase.
As with any investment, annuities also carry a number of risks. Some of the drawbacks of investing in a deferred annuity include:
Risk of Loss
While variable deferred annuities allow the opportunity to invest in stocks and bonds, they carry a level of risk. Investing in the financial market may offer a long-term pay increase, but annuitants risk losing a portion of their interest and investment if the sub-accounts perform poorly.
Surrender Charges
If annuitants choose to break their contracts prior to the end of their term, they will be charged surrender fees. In some cases, it can be more expensive to break a contract early and pay surrender fees than to continue with the initial annuity contract terms.
Selling Your Deferred Annuity
Though investing in a deferred annuity can be a profitable decision, it is also a long-term one and doesn’t account for change in circumstance over time. In the face of debt, college tuition or emergency home renovations, selling some or all of your deferred annuity for cash may be the most beneficial scenario for you.
If you feel owning a deferred annuity is no longer the right decision, let CBC Settlement Funding help you. With an A+ rating from the Better Business Bureau and ample experience in the financial industry, CBC Settlement Funding is qualified to help you sell some or all of your annuity. Call us today to receive a free consultation to discuss your options.
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