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Investment Simplified > Pension & Retirement > What is Deferred Annuity, Benefits, and How it Works
Pension & Retirement

What is Deferred Annuity, Benefits, and How it Works

Lakshey Bahl
Last updated: 2022/06/30 at 11:59 AM
Lakshey Bahl Published May 10, 2022 8 Min Read
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What is a Deferred Annuity? Types of Deferred Annuity PlanBenefits of Deferred Annuity PlanFAQs

The practice of preparing for retirement is a universally daunting moment in one’s life. As a person steps away from the workforce, their life may fleetingly be consumed by moments of doubt and fear. To start a new chapter that is meant for relaxation and reflection, retirement is one of the bittersweet landmark moments in a person’s life that provoke great lifestyle changes. The sudden shift in lifestyle is one of the bigger reasons why a person may feel uneasy during retirement.

This sudden shift in lifestyle is not simply limited to not heading to work anymore, but also the change in finances. While retirement benefits and pension plans exist, a person may find it difficult to navigate their ideal method of transition from a stable income to an income replacement sum. It is imperative to have a strong financial ground through times like retirement so that the insured can have a stress-free transition. Annuity plans are instrumental in providing the right kind of financial support during the time before and after retirement, as they are devoted to accumulating and paying out funds as per the insured’s preferences. 

Let us take a closer look at some of the ideal retirement annuity plans like deferred annuity which can mitigate chances of monetary distress during and after retirement. 

Key Takeaways

  • A deferred annuity is an insurance instrument designed for retirees that guarantee the customer a regular income or a lump sum payment at a later period. 
  • There are many kinds of deferred annuity plans available such as fixed, indexed, or variable, depending on how their rates of return are calculated.
  • If you want to process a withdrawal from your deferred annuity plan, you might be liable to pay surrender fees as well as a tax penalty.
  • In most cases, a deferred annuity plan is used by investors to supplement their retirement income. Immediate annuities are those that begin payout disbursal immediately, whereas deferred annuities work differently.

What is a Deferred Annuity?

Falling under the various annuity plans that can be used by retirees to aid their post-retirement finances, a deferred annuity plan has many features. A deferred annuity plan is one that is geared toward long-term savings. It’s a type of insurance policy that doesn’t pay off right away. By adding funds to the account, you can raise the value of the annuity. The key thing about this investing choice is that you can take a lump-sum withdrawal anytime you need it.

In the course of a deferred annuity plan, there are two phases; the accumulation phase and the payout phase. The accumulation phase refers to the time when the investor is making payments into the annuity account (or savings phase). The payout phase commences after the investor decides to start receiving money. A deferred annuity plan is designed to pay out for the rest of the owner’s life, as well as the life of their partner. 

Types of Deferred Annuity Plan

In order to cater to various economic brackets and preferences, insurance providers keep the options within deferred annuity plans open as well. Fixed, indexed, and variable deferred annuities are the three of the fundamental types of Deferred Annuity plan. Indexed annuities give you a return based on the success of the market. The performance of a portfolio of mutual funds, or sub-accounts, chosen by the annuity owner determines the return on variable annuities.

  • Fixed: A cash deposit is equivalent to a fixed delayed annuity. These will pay you a predetermined rate of interest on the money you have in your account. The minimum amount you will receive is determined ahead of time. The payout can be greater than the agreed-upon sum, but it cannot be less than the agreed-upon minimum. The interest, on the other hand, is deferred until you do not cancel the contract. These annuities aren’t the ideal choice if you don’t want to earn interest.
  • Variable: The money are retained in an investment account in a variable deferred annuity, and then investments are made based on risk tolerance, age, and other characteristics. You have a limited selection in this situation, which comprises both stocks and bonds. You can’t expect a constant return because the return changes depending on the assets in the mutual fund portfolio you choose. This will be tax-deferred until you withdraw it. However, you can expect to receive rider benefits such as future income or a death benefit as a result of it.
  • Indexed: Equity-indexed annuities are another name for these annuities. There are both fixed and variable deferred annuities in them. Some investors think of it as a fixed annuity since it guarantees a minimum return, just like fixed annuities. You also have the option of linking your earnings to a return-based formula in a certain market.

Did you Know

A death benefit is frequently included in deferred annuities. If the owner passes away while the annuity is still accruing value, their heirs may be entitled to a portion or all of the account’s value. If the annuity has reached the payout phase, the insurer may simply keep the remaining funds unless the contract specifies that benefits would be paid to the owner’s heirs for a set period of time.

Benefits of Deferred Annuity Plan

A sequence of payments is referred to as an annuity. When you invest in a deferred annuity, you have the option of withdrawing as much as you need at any time, or transferring the assets to another account to fulfil your needs. There’s no need to turn the money into a regular revenue stream.

  •  You can choose from a variety of payment options offered by your insurance company. There are possibilities to select funds that cover either your lifetime or the lifetime of your spouse, whichever is longer.
  • In a deferred annuity, you can either wait indefinitely to annuitize and begin payments, or you can accept the payment in a lump sum whenever you wish. The annuity is paid to the individual after the deferred phase is completed under a deferred annuity plan.
  • Post the completion of the accumulation phase, the payment phase begins. You can accept withdrawals throughout this phase, and if you do so beyond the age of 59.5, you will not be penalised. You have the choice of receiving the funds in a variety of ways or deferring the annuity permanently. 
  • During the accumulation phase, you can add money to the account if the tax laws allow it and your insurance company agrees. You can sometimes make a one-time contribution or leave the account empty. However, during the accumulation period, you must adhere to all of the requirements.

Conclusion

There are advantages and disadvantages to investing in deferred annuities. Whether or not it’s a good long-term investment relies entirely dependent on your retirement priorities, risk tolerance, and financial objectives. Deferred annuities are generally regarded as a safe investment option because they are only sold through contracts by insurance companies and are governed thorough regulation.

FAQs

1. What is deferred annuity plan?

A deferred annuity plan is one that is geared toward long-term savings. It’s a type of insurance policy that doesn’t pay off right away. By adding funds to the account, you can raise the value of the annuity. The key thing about this investing choice is that you can take a lump-sum withdrawal anytime you need it.

2. What is a variable deferred annuity plan?

The money are retained in an investment account in a variable deferred annuity, and then investments are made based on risk tolerance, age, and other characteristics. You have a limited selection in this situation, which comprises both stocks and bonds. You can’t expect a constant return because the return changes depending on the assets in the mutual fund portfolio you choose. This will be tax-deferred until you withdraw it. 

3. What is an indexed deferred annuity plan?

Equity-indexed annuities are another name for these annuities. There are both fixed and variable deferred annuities in them. Some investors think of it as a fixed annuity since it guarantees a minimum return, just like fixed annuities. You also have the option of linking your earnings to a return-based formula in a certain market.

4. What are some accumulation stage benefits in Deferred Annuity Plans?

During the accumulation phase, you can add money to the account if the tax laws allow it and your insurance company agrees. You can sometimes make a one-time contribution or leave the account empty. However, during the accumulation period, you must adhere to all of the requirements.

Read more about Best Retirement Plans.

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