Understanding Deferred Annuities

Annuities are one of many unique investment opportunities that help you secure a better financial future and grow your wealth. When you purchase an annuity, you're creating a contract with a financial institution to get a stream of payments in the future.

There are two primary types of annuities you can purchase. However, one of the most popular is a deferred annuity.

With a deferred annuity, payments begin later in the future. That could be as little as two years away or several decades. Either way, there's a delay in when payments start. That contrasts with an immediate annuity, where distributions start shortly after funding. Whether you fund the annuity over many years or invest in a single premium deferred annuity, you won't receive payments until the date designated on the contract.

Because of the deferred distributions, this type of annuity is popular in retirement planning. It's a great way to get an additional income stream or create plans to continue living comfortably should you outlive savings.

Types of Deferred Annuities

Three primary types of deferred annuities exist. These include fixed, indexed and variable annuities.

Fixed annuities guarantee a rate of return on the money you invest. That rate can vary based on when you purchase an annuity and what financial institution issues it. But because it's fixed, you'll know how much you get.

An indexed deferred annuity provides a return based on a specific market index. In most cases, that's the S&P 500. Index annuities can provide fluctuating returns, so a higher degree of risk is involved.

Finally, we have variable annuities. When you purchase a single premium deferred annuity of this kind, you can choose a portfolio of mutual funds or subaccounts. The return you'll receive will depend on that portfolio's performance. Like indexed annuities, variable annuities have more risk than fixed annuities.

Regardless of the type of deferred annuity you get, growth is tax-deferred. You'll only pay taxes once you receive payments on the designated date. If you take a lump sum or withdraw early, tax obligations will also exist.

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