Deferred Annuity
AdvancedA deferred annuity is an insurance contract in which a person invests money, either as a lump sum or through regular payments, which grows over time before being converted into income payments starting at a later date.
A deferred annuity has two phases. In the accumulation phase, money is invested and grows. In the payout phase, the accumulated value can be taken as regular income, often for life, or sometimes as a lump sum.
Deferred annuities can be fixed, earning a guaranteed interest rate; variable, with returns linked to investment funds; or indexed, with returns linked to a market index within limits.
For example, a 50-year-old might invest 100,000 in a deferred annuity, letting it grow for 15 years before starting lifetime income payments at age 65.
In some countries, notably the United States, deferred annuities offer tax-deferred growth, with tax paid only when money is withdrawn. They often include surrender charges if money is withdrawn in the early years, and fees can be significant, especially for variable annuities with added guarantees. A related product, a deferred income annuity, is bought now to provide guaranteed income starting at a set future age, often used as protection against living to a very old age.
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