As the title goes, save now, enjoy later. That is just the way deferred annuity works. By definition, a deferred annuity is another type of annuity that delays either the monthly or lump-sum payments until a specified date opted for. The accrued interest usually are tax-free until it is withdrawn.

The annuity plan allows you to save towards a deferred income. It is also an avenue for employees or self-employed individuals to regularly accumulate money during their active days so as to guarantee regular streams of income later in life.

Usually the deferred annuity age range (when you will start receiving either monthly payment or the lump-sum) starts when you are 50, 55, 60, 65, 70 and 75 depending on the age you specified.

There are two levels in the life of a deferred annuity: the savings or accumulation phase, and the income or annuitization phase. During the accumulation phase, you will deposit money into the account specified by the insurance company you intend to use either periodically or all in one lump-sum.

When the annuity reaches the contractually agreed-upon date (that is, the age you set), you will begin to receive several payments either monthly or quarterly for life or in one lump-sum.

It is important to note that earnings on a deferred annuity are only taxed when they are withdrawn. However, if you withdraw money before the contractually agreed-upon date, you may have to pay considerable surrender fees.

You may also have to pay a 10% penalty tax if you are younger than 59.5 years old, even if the surrender period has expired.

However, the important feature of deferred annuities is the family protection, or death benefit, which guarantees that, should the owner die during the accumulation phase, the beneficiary will receive at least the amount of the owner’s investments minus withdrawals, or the current market value of the account.

Often, the beneficiary cannot take advantage of a “step-up” in basis on an annuity, meaning that he or she becomes responsible for paying income taxes on all the gains in the account since it was opened.

Importance of Deferred Annuity

  • Income is payable for life
  • Annuity payment for the guaranteed period of 5 years and thereafter for life of the annuitant
  • Regular payment is by standing order and on an online, real times basis
  • Annuitants are assured of regular income for life
  • Annuity Escalating options at 5% and 10%
  • Additional death benefit which is 5 times the annual annuity (Optional)
  • Longevity risk
  • Provision of income for dependents
  • Investment risk is passed to the life office

Investors purchase deferred annuities for many reasons, the most common being the tax deferral of earnings, the lack of restrictions on the amount of the annual investment, and the guarantee of a lifelong annual income. Control over the investment decisions and the ability to switch between investments is also attractive to some investors.

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