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Immediate vs. deferred annuities

When selecting the right annuity contract for your income needs and retirement plan, one of the first decisions you鈥檒l come across is choosing an immediate annuity or a deferred annuity. Each has its own distinct features, and selecting the right one will depend on a number of factors including your other income sources, retirement plan, and more.

Let鈥檚 take a look at some of the basic considerations before approaching an insurance provider and purchasing an annuity contract.

What is a deferred annuity?

A deferred annuity is an insurance contract that can be purchased using a lump-sum payment or premium payments over time. In return, the annuity provider makes certain guarantees, such as income paid back to the purchaser at a future date, either as a lump sum or regular payments. Deferred annuities can also be used to accumulate wealth over time while helping provide a certain level of protection from market volatility, depending on the type of product. 

A fixed deferred annuity guarantees annuitants a specific rate of interest, whereas an indexed annuity bases interest credits, in part, on the performance of a benchmark index, like the S&P 500^庐. 

Again, it鈥檚 important to emphasize that these are broad categories, and the nuances of each individual annuity product will vary, including its payment options.

What are the withdrawal value options for a deferred annuity?

When you purchase a deferred annuity, review the withdrawal features and potential limitations.

If an annuity has a free withdrawal feature, you may be able to withdraw up to a certain amount or percentage without a penalty, or for a qualifying reason such as an illness. Should you exceed the withdrawal limit, for example, you may have to pay a withdrawal charge. 

What distinguishes an immediate annuity from a deferred annuity?

Unlike a deferred annuity, an immediate annuity does not include an accumulation period, and you can begin receiving annuity payments within one year of purchasing the contract. An immediate annuity is designed to help those in or near retirement convert their lifelong retirement savings into a steady and secure cash flow. Similar to a pension plan, a single premium immediate annuity can provide income for life. 

A deferred annuity can be used for retirement planning purposes in a different way. It provides an opportunity to accumulate more wealth over time before withdrawals begin. Because some deferred annuities may include levels of protection against market downturns, they can offer growth potential while helping provide a layer of portfolio protection.

What are the differences in flexibility between an immediate annuity and a deferred annuity?      

An immediate annuity is converted into income within the first year after purchase, while a deferred annuity can grow and accumulates value over time. Because an immediate annuity is quickly leveraged into retirement income, it is less flexible. 

You may choose how long you鈥檇 like to defer payments and give your money the opportunity to grow. 

Tips for choosing between immediate or deferred annuities in your retirement planning

When choosing between an immediate annuity and a deferred annuity, one important factor to consider is time. If you are approaching or are in retirement, you and your financial professional may be most focused on converting your lump-sum savings into reliable, steady income. 

For those who are not seeking immediate retirement income, however, a deferred annuity may offer greater flexibility and more opportunity to benefit from market growth. 

When comparing options, it鈥檚 important to consider your other potential retirement income sources, like Social Security, pension plans (if applicable), investments, and savings. Remember to account for the potential income tax liability of your annuity withdrawals as well, as this can impact your overall tax bill in retirement. 

Achieve more with 狼窝导航 

Depending on your accumulation goals, timeline toward retirement, and other factors, you and your financial professional may find it beneficial to consider an annuity. One of the first decisions you鈥檒l need to make when researching options, however, is whether to opt for an immediate annuity (which can convert your lump-sum funds into steady payments now) or a deferred annuity that can give your portfolio time to grow.

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