Deferred Annuity: Meaning, Benefits & How It Works

A deferred annuity is among the most important and trusted financial tools when discussing retirement plans or securing future income. But what exactly does it mean, and what sets it apart from the numerous other options? In this blog, we'll discuss everything you need to know about deferred annuity.

What is a Deferred Annuity?

A deferred annuity is a type of annuity plan created to provide a steady income stream, usually during retirement. Unlike immediate annuities, which start paying out immediately, a deferred annuity has an accumulation period. That is, you pay the upfront charge all at once or over time and let the money grow with interest until you begin taking your payouts. For this reason, deferred annuities work best for people planning long-term income needs, especially in retirement.

The deferred annuity definition is one of the most important things for an investor. Primarily, it is an agreement you enter with an insurer whereby you are guaranteed regular payments at a future date. Simply put, you can control when to start receiving the funds. This flexibility is very helpful, especially if you want to supplement your other sources of retirement income, such as pensions or savings.

How Does Deferred Annuity Work?

The principle behind how deferred annuities work is relatively simple: You start by paying premiums into the annuity. It grows tax-deferred during accumulation. Unlike other investments, you will not have to pay immediate taxes on interest or growth within the annuity until you begin receiving distributions. In other words, it cumulatively builds a person's wealth over time and offers tax advantages that add to the benefit of waiting for payouts. There are 2 phases in this:

• Accumulation Phase: This first phase allows your money to grow tax-deferred faster than in other taxable investment plans.
• Payout Phase: Once you have reached your targeted start date to begin receiving income, you enter the payout phase. You begin getting a steady income stream and sometimes lump-sum payments under the plan's terms.

Most plans for deferred annuity are flexible; you can set the time you'd like the income to last, be it for a specified number of years or the rest of your life. The funds you receive will also be taxed as ordinary income, which usually works well for retirees because they fall into a lower bracket.

Types of Annuity Plans

Different annuity plans have different benefits, catering to various financial goals and risk tolerance. The main types of annuity plans are as follows:

• Fixed Annuity: As the name goes, it guarantees a fixed interest rate on your contributions during the accumulation period. Ideally, It is designed for conservative investors who want predictability and stability over high returns. With a fixed deferred annuity plan, you are protected from market volatility.
• Variable Annuity: This one invests your money in sub-accounts, which function like mutual funds, leaving more room for growth. However, the returns depend on the market, which will be best for those with a higher risk tolerance.
• Indexed Annuity: This product is linked to a specific market index, such as the S&P 500. Due to a rate floor, you benefit from growth while the principal remains intact. It's a very popular hybrid product for those desiring security balanced with growth.

Benefits of a Deferred Annuity

Now that you understand the meaning of deferred annuity and the types, let us look at some of the main benefits that make it a popular choice for retirement planning:

• Tax-Deferred Growth: One of the most attractive features of deferred annuities is the provision for tax-deferred growth. You will pay no taxes on your earnings until you start withdrawal; this can be instrumental in letting your money grow effectively while it's in the accumulation period.
• Income Flexibility: You can choose when to begin payouts and how long they last, whether over a specified period or your lifetime. This flexibility can be particularly useful if you're coordinating the annuity with other sources of retirement income, such as an immediate annuity plan or pension.
• Protection against Market Volatility: When you buy a fixed deferred annuity, the return is somewhat guaranteed, protecting you against market ups and downs. This certainty is important for risk-averse investors or those closer to retirement who do not compromise their savings.
• Lifetime Income: The deferred annuities can provide income for the rest of your lifetime if structured as lifetime payouts. For retirees, this is a major advantage because one of their greatest fears is outliving their savings. In this way, it assures them of a consistent flow of income.

Immediate Annuities Vs. Deferred Annuities

Now, one might wonder the difference between a deferred annuity and an immediate annuity plan. While immediate annuities start paying almost immediately after one invests in them, the deferred annuity allows your investment to grow during the waiting period before the disbursements of the return start. Immediate annuities are big for those looking for instant income, while deferred annuities work best for long-term planners who don't need immediate payouts.

Conclusion

A deferred annuity plan is a financial instrument that assures tax-deferred growth and flexible payout options while providing for future income. Hence, by understanding the definition of deferred annuity and the unique benefits of such an investment, you can decide if this product aligns with your retirement plan.

Whether balanced with an immediate annuity plan or other investment options, the deferred annuity plan offers a sure route to financial security in your retirement years. Secure your future with PNB Metlife's Immediate Annuity Plan and enjoy a guaranteed income stream for life.

Related Articles:

1. Retirement Planning: What Do I Need to Know About Retirement Planning?
2. How to Plan for Retirement with a Voluntary Retirement Scheme?
3. Understanding Pension Plans – Best Pension Plan in India
4. Guide to Pension Planning: Types of Pension Schemes in India

Disclaimer: