Deferred Annuity: Definition and Examples


A deferred annuity is an insurance contract promising future regular income or a lump sum payment. Different from immediate annuities, these plans provide payouts at a later date. They come in fixed, indexed, and variable forms, each with distinct return computation methods. Tax-deferred growth characterizes all, with taxes applying upon withdrawals. Understanding withdrawal rules and penalties, fees, and the potential death benefit is crucial for informed decision-making.

Exploring deferred annuities: Securing your financial future

When it comes to securing your financial future, a deferred annuity is a strategic tool to consider. This insurance contract, offered by reputable companies, guarantees to provide you with a consistent income stream or a lump sum at a designated future point. In this comprehensive guide, we’ll delve deeper into the world of deferred annuities, understanding their types, mechanisms, advantages, and factors to consider before making a decision.

Understanding deferred annuities

A deferred annuity stands as a contractual agreement between an individual and an insurance company, wherein the insurer commits to paying the policyholder a set amount periodically or a lump sum payment on a specified future date. The allure of a deferred annuity often lies in its potential to augment your retirement income, supplementing sources like Social Security. Unlike immediate annuities, which initiate payouts immediately, deferred annuities provide you the flexibility of choosing when the payouts should commence.

Types of deferred annuities

There are three primary types of deferred annuities: fixed, indexed, and variable. Fixed annuities offer a guaranteed rate of return on your investment, providing stability and predictability. On the other hand, indexed annuities tie your returns to the performance of a particular market index, such as the S&P 500, allowing for potential growth linked to market performance. Variable annuities offer returns based on the performance of a portfolio of mutual funds or sub-accounts, enabling more significant potential growth but with increased risk.

Deferred annuities: the financial mechanics

The tax advantage of deferred annuities is a crucial feature. Your invested money grows tax-deferred, meaning you won’t pay taxes on the accrued earnings until withdrawals commence. These withdrawals are subject to ordinary income tax rates. The annuity undergoes two key phases: the accumulation phase and the payout phase. During the accumulation phase, you contribute to the annuity, while the payout phase is when you start receiving income.

Benefits and considerations


Here is a list of the benefits and the drawbacks to consider.


  • Secure Growth: Fixed annuities guarantee a predetermined return, providing stability.
  • Market-Linked Returns: Indexed annuities can harness market growth for increased returns.
  • Potential for High Returns: Variable annuities offer the potential for substantial gains through diversified investments.
  • Tax-Deferred Growth: All deferred annuities enjoy tax advantages during the accumulation phase.


  • Liquidity Limitations: Deferred annuities are less liquid than other investments, restricting withdrawals.
  • Withdrawal Penalties: Withdrawals before a specified age may incur surrender charges and a 10% tax penalty.
  • High Fees: Annuities can have higher fees compared to other investment options.
  • Complexity: The variety of annuity types and rules can be intricate and challenging to grasp.

Crucial considerations before committing

Before diving into a deferred annuity, several key factors warrant careful consideration:

  • Liquidity Needs: As deferred annuities have limitations on withdrawals, ensure you maintain a separate emergency fund.
  • Surrender Fees: Be mindful of potential surrender charges imposed by insurers for early withdrawals.
  • Tax Implications: Understand the tax implications of withdrawals and the potential 10% penalty if withdrawn before a certain age.
  • Fees Variation: Shop around for the best fees as they can vary significantly among insurance providers.
  • Death Benefit: Recognize the death benefit component, which varies based on when the annuity is in the accumulation or payout phase.

Frequently asked questions

Can I access my money from a deferred annuity whenever I want?

Deferred annuities typically have limitations on withdrawals during the accumulation phase, and there may be surrender charges for early withdrawals. It’s essential to understand the withdrawal rules before committing.

Are there any tax implications when I start receiving income from a deferred annuity?

Yes, when you start receiving income, the payouts are taxed at your ordinary income tax rate. It’s crucial to consider the tax implications when planning your retirement income strategy.

How do fees for deferred annuities compare to other retirement investments?

Deferred annuities often have higher fees compared to some other retirement investment options. It’s a good idea to shop around and compare fees among different insurance companies.

What happens to a deferred annuity if I pass away during the accumulation phase?

In the event of your death during the accumulation phase, your heirs may receive some or all of the account’s value, depending on the terms of the annuity contract.

Key takeaways

  • A deferred annuity is an insurance contract that promises future regular income or a lump sum payment.
  • Three main types: fixed, indexed, and variable annuities, each with unique features.
  • Advantages include tax-deferred growth and potential for secure, market-linked, or high returns.
  • Considerations include liquidity, withdrawal penalties, fees, tax implications, and death benefits.
View Article Sources
  1. Deferred Annuities Certain – University of Texas
  2. Cornell University Tax-Deferred Annuity Plan (TDA) – Cornell University
  3. Deferred Annuity – U.S. Securities and Exchange Commission
  4. Buying Fixed Deferred Annuities – South Carolina Department of Insurance
  5. 3 Tips on How To Get Out Of An Annuity – SuperMoney
  6. What Are the Disadvantages Of An Annuity? Here Are the Pros and Cons – SuperMoney