Immediate Annuities vs. Deferred

The difference between immediate and deferred annuities refers to the decision you make about when you want to receive income. Do you want to receive payments now (immediate annuity), or can you wait until a later date (deferred annuity)?

Immediate Annuities

Immediate annuities will begin to make payments to you soon after your initial investment, usually within thirty days. You can decide to get those payments for a fixed period of time, like twenty years, or if you think you are going to live longer than that, you can chose to receive payments for the rest of your life. If you are married, you can choose to have your spouse receive the payments after you die, and those payments would continue for the remainder of your spouse’s life.

The following are main characteristics of immediate annuities:

Reliable, steady income stream.
Simple. The insurance company handles all investment responsibilities.
Low-risk. Your income is guaranteed.
Tax-efficient. You only pay taxes when you receive the income.
The emphasis with an immediate annuity is on security. The trade-off for the reliability in payments is in investment performance. You can typically expect fairly conservative returns that do not often exceed the performance in bond markets.
An immediate annuity is an irrevocable one-time purchase. Once you hand over your money to the insurance company, you are locked into the agreed upon payment. If you underestimate your expenses or have an emergency need for liquidity, you generally cannot get money from your annuity.
The benefit normally ceases once you die.

Based on LIMRA’s examination of 55,000 annuity contracts issued in 2008 and 2009, the average age at purchase for an immediate annuity is 73, and the average premium for an immediate annuity was just over $107,000.

If you want assurance that you will receive monthly income regardless of how long you live, an immediate lifetime annuity can be a good option for you.

Deferred Annuity

Unlike immediate annuities that pay out right away, the deferred annuity accumulates money for a period of time.

In a deferred annuity, your investment accumulates for a period of time before distributions start. You typically decide when in the future you want to begin receiving income. For most people, the trigger is retirement. The funds remain in accumulation mode until retirement. The longer the period of the annuity, the more time for investment growth.

The way in which you fund a deferred annuity is by either making a lump sum payment or through periodic payments. If you choose to make periodic payments, you can either have a fixed or level premium payment arrangement, or a flexible premium payment arrangement. Your funds will enjoy tax-deferred growth until you are ready to begin receiving payments.

The following are the fundamental characteristics of deferred annuities:

Tax-efficient. You only pay taxes when you receive the income from an annuity. At that time, you will most likely be in a lower tax bracket than you were when you purchased the annuity.
Liquidity. Unlike immediate annuities that lack in liquidity options, deferred annuities allow for you to withdrawal minimal amounts from your annuity (usually up to 10-15%) before incurring surrender charges. Those withdrawals, in most cases, can begin as soon as thirty days from the time the contract was initiated. If you withdraw more than the allotted amounts, a surrender fee will be assessed. Surrender fees can, depending upon the contract, be steep.
No contribution limits. Unlike some retirement funding vehicles, the Internal Revenue Service does not restrict the amount of money that you contribute each year to a deferred annuity.
Fees. The issuing insurance company will charge a variety of management fees. These fees are deducted directly from the annuity.
The IRS will impose a 10% tax penalty for moneys withdrawn before you have attained 59 ½ years of age. In addition, you may incur surrender fees imposed by your insurance company for withdrawals exceeding the contractually permitted amounts.

Deferred annuities are currently the most popular annuity on the market in the United States. They may be a good option for you if you have several years to invest prior to retirement, and are unlikely to need access to those funds.