Deferred Annuities

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For retirement purposes, one of the most popular options is a deferred annuity. It is a kind of long term, private retirement fund, which can help build on your assets and wealth. Moreover, deferred annuities can give you a continuing source of income even after you retire.

You can purchase a deferred annuity via a single, lump sum deposit and then add to it or you can distribute your deposits over time.

Aside from deferring payouts for a later time, deferred annuities also have earnings that are tax-deferred. This means your earnings are not subject to taxes until you withdraw your money, which you may opt to do when you retire.

US federal income tax laws charge you a 10% penalty (on top of other taxes) if you withdraw your annuity before the age of 59½.

Your insurance company or broker invests your deferred annuity deposits and when your funds make money, this internal cash build up cannot be taxed if you do not touch it.

Types of Deferred Annuity

Deferred annuities can be either variable (invested in a fund of your choice) or fixed (guaranteed a fixed interest rate over a fixed time).

• Fixed deferred annuity – Since your broker or insurer will guarantee your principal investment and interest rate, it is crucial to select a stable company that will still be there tomorrow and be able to deliver on its promise. Although companies usually reset interest rates periodically, these will never go below the minimum rate in your contract.
• Variable deferred annuity – These are more flexible and offer you the option of investing in stocks and bonds, which can yield higher returns for your investment than a fixed deferred annuity can. However, returns cannot be guaranteed.

The Different Phases of a Deferred Annuity

Deferred annuities have two main phases:

• Savings or investing phase – During this phase, your assets start to build for potential growth.
• Income or retirement income phase - During this phase, you get to choose how your income payouts are made. You can choose from different payout schemes, such as periodic withdrawals, or you can ‘annuitize’ your contract and opt for steady income payments similar to a pension. You can also choose to have these payments made to you over a fixed period or have them distributed as a lifetime income.

Guaranteed Death Benefit

Annuity brokers generally give you the option of guaranteed death benefits, and this is usually done before you annuitize your contract. You will also be given the option of increased death benefits over time. This death benefit will, of course, be added to the total cost of your annuity.

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