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Investment Simplified > Pension & Retirement > What are Deferred Annuity Plans?
Pension & Retirement

What are Deferred Annuity Plans?

Lakshey Bahl
Last updated: 2022/07/07 at 6:58 PM
Lakshey Bahl Published July 6, 2022 11 Min Read
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Deferred Annuity Explained The functionality of the Deferred Annuity Plan Different Types of Deferred Annuity Benefits of Deferred Annuity Tax Benefits Risks of Deferred Annuity How to Choose the Right Deferred Annuity for Yourself? FAQs

When you approach retirement, one of the main concerns that most people face is their finances. Since they will no longer be actively employed and earning, how do they continue living their regular lives? Well, to help you aid these problems, insurance companies and financial institutions have developed policies such as a deferred annuity. So, what are deferred annuity plans, and how can they help you generate a healthy corpus for your retired life? Let’s find out!

Key Takeaways

  • Deferred annuity plans can provide life-long income post-retirement.
  • Deferred annuity plans require your active participation for a considerable period in the form of investments.
  • Deferred annuities are available in three main types.
  • Deferred annuities feature multiple benefits for policyholders that can help them. provide financial freedom to their families even after death.

Deferred Annuity Explained

A deferred annuity is a type of investment where you can invest your money in either lump sum or instalments and get lifelong returns on your investment upon maturity. Yes, you read that right, lifelong returns. Annuity plans are known for offering returns post-retirement on a regular schedule as long as you are alive.

Deferred annuities have two distinct phases. First comes the accumulation phase, where you invest your money in lump sums or instalments and complete the lock-in period for your money to acquire interest. Next in the payment phase, you receive your payouts as per your wish, either in a lump sum or regular payouts for a set period or till death. Even in case of your untimely demise, these policies generally allow you to nominate a beneficiary. Your chosen beneficiary becomes eligible to receive the benefits of your policy till their death or as you had specified in your policy.

Did You Know?

Did you know that the money you invest in deferred annuity plans is tax-exempt? Not only that, but with a tax deferred annuity, you can also withdraw up to 33% of your annuity corpus without having to pay taxes on them.

The functionality of the Deferred Annuity Plan

To understand how a deferred annuity plan works, you need to first understand how annuities work as a whole. An annuity plan is a contract between you and the insurance company where you pay them upfront, and they provide you with regular payments upon the completion of the lock-in period. You get regular payouts and even get the death benefits, which are like life insurance coverage for your annuity. That is a general understanding of annuities as a whole. Other than deferred annuities, you have single premium deferred annuity, which is known as immediate annuity plans.

In the case of deferred annuities, the investor is contributing to the fund for a long time before the maturity of the fund. This is in contrast to immediate annuities, where you invest in a lump sum and get returns almost immediately after you have invested. Plus, deferred annuities provide tax benefits as the money you invest in them is considered tax-exempt according to income tax laws.

So, to sum it all up, in the case of deferred annuities, you invest throughout your life and get benefits once you are retired with regular monthly or yearly payouts for the rest of your life. Based on the type of deferred annuity plan you have invested in, you will get returns. So, to learn more about deferred annuity, you must learn about the various types of this policy.

Different Types of Deferred Annuity

When you invest in a deferred annuity policy, the type of your annuity significantly impacts the returns you get from your policy.

Fixed-Rate Policies

As the name suggests, fixed-rate policies offer fixed returns on your investment. These policies generally disclose their minimum return rates before you purchase the policy and offer what they promise on maturity. These policies have virtually no risk as the returns are guaranteed regardless of market conditions. These policies are great for people that are fast approaching retirement age and need stable returns more than market-based returns. One thing you should know, however, with fixed-rate policies is that they don’t come with inflation protection.

Indexed Rate Policies

Indexed rate policies are inherently linked to the stock market. The performance of the stock/money market determines the return rates you will receive with these policies. The returns of an indexed rate policy can be used to hedge inflation. Deferred indexed rate annuities offer a minimum return rate to protect the interests of the investors. However, it also comes with a maximum return rate. So, this type of deferred indexed annuities is somewhat safe from market volatility and can offer respectable results over a long period. This makes these policies perfect for people that can invest for a long time before the policy matures.

Variable Rate Policies

The type of deferred annuity that has the option for most returns is variable rate policies. These policies offer great potential for maximum returns but also come with very high risk. Unlike indexed rate policies, there are no minimum or maximum guaranteed returns with these policies. The money you invest is invested in the market to sub-accounts into stocks, bonds, and the money market.

Based on the returns on your investment, you are offered returns on your policy. As you can imagine, the better these fund investments perform, the higher your returns will be. However, you should know that these policies can even yield negative returns if the investments perform poorly. So, it’s crucial you understand the risks involved before investing in these policies.

Benefits of Deferred Annuity

Deferred annuity policies are preferably one of the best annuities out there. Why? Let’s find out!

Power of Compounding

When you invest in a deferred annuity plan for a considerable period, the more time you invest and let your money grow, the higher your returns will be. As with most investments, the power of compounding is best experienced when you invest for a longer period. So, as deferred annuities offer you the opportunity to invest longer, you can rest assured your investments will bring higher returns than other annuities with deferred annuity policies.

Tax Benefits

Deferred annuity investments can be used to reduce your tax burdens. As long as you invest in these funds, you can claim these investments for tax deduction. However, you have to learn about the governmental guidelines about the maximum amount you can claim as tax deduction annually from your investments to deferred annuity plans. Another tax benefit of these plans is that the amount you build in your annuity account is taxed only when you withdraw the money. Even in case of withdrawal, there are provisions that allow you to withdraw up to 33% of your annuity corpus without having to pay any taxes on it.

Unlimited Capital Building

There is no cap on the amount you can invest in your annuity funds. This allows people with the necessary resources to invest large sums in these policies both as a lump sum or in instalments. The higher investment value enables such policyholders to gain significant returns from the policy.

Other Benefits

Much like other annuities, deferred annuities also offer a range of benefits, including death benefits and survivor’s benefits. These benefits ensure that in case of your untimely demise, the financial future of your loved ones are protected. These benefits add the cover of life insurance to your deferred annuity plans.

Risks of Deferred Annuity

All roses come with thorns, so to balance out the benefits, here are some of the risks you must be aware of before investing in deferred annuities.

Complexity

One of the factors that make deferred annuities not as popular as they should be among investors is their complexity. These policies have a lot of fine print that non-specialists are not supposed to understand. This results in policyholders not getting satisfactory returns or being bombarded with fees when they try to withdraw their life’s savings. So, if you are interested in investing in these policies, you must read the fine print and understand it before investing.

Illiquid

If you choose to surrender your deferred annuity policy, it will be surprisingly challenging. It is considered quite difficult to get your money out of these non commutable deferred annuity plans. If you try, you will be charged various fees, including a surrender fee.

How to Choose the Right Deferred Annuity for Yourself?

Choosing the right annuity depends a lot on your personal lifestyle choices and your post-retirement financial goals. Keeping these in mind, there are a few pointers that can help you choose the best deferred annuity plans for yourself.

Risk Tolerance

If you are starting your investing early and you have over a decade or two to invest, you can surely go for higher risk policies. The returns on any investment in the long term are sure to be positive, so you can be assured that the returns you receive will offer more than the minimum guaranteed return rates. However, in contrast, if you are close to your retirement age, you should adjust your risk tolerance adequately to ensure you get stable returns at lower risk.

Financial Goals

Deferred annuity plans are long-term investments. So, you must be able to plan your finances adequately so that you are not required to touch your annuity account during the surrender period. If you withdraw during the surrender period, you are charged various fees, which will just diminish your corpus extensively. So, be sure that you are ready to commit to these investments before you purchase the policy.

Word to Remember

Corpus: Corpus can be defined as the total amount of money that is invested in any financial instrument by all investors. In a personal sense, a financial corpus accounts for the amount of money you have accumulated/invested in any financial instrument.

Conclusion

Deferred annuity plans, much like other annuities, come with various benefits and some risks. As it is a long-term investment plan that has some fine print involved, it’s crucial that you understand the policy well before investing. Apart from that, deferred annuities are an excellent way for you to take care of your post-retirement finances when you are no longer actively employed.

FAQs

Are deferred annuities good investments?

Yes, deferred annuities are suitable investments for people that have time on their hands to invest for a long time before the maturity of these policies. That’s the way to get the best returns from deferred annuities.

Can you lose your money investing in deferred annuities?

No, you cannot lose your money investing in deferred annuities because these policies offer a minimum guaranteed return on your investment regardless of market performance.

Can you get coverage for your spouse with deferred annuities?



Yes, you can get coverage for your spouse with deferred annuities by opting for either death benefit or survivor’s benefit. In such cases, the surviving spouse will receive a regular income till the end of their life.

Read more about Defined Benefits Pension Plan.

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