What is a deferred annuity?

Usually an annuity contract is created when an insured party pays an annuity company a single premium that will later be distributed back to him over time. However, sometimes an investor may choose to defer annuity payments income, installments or a lump sum until he/she elects to receive them (e.g until he/she retires). This type of annuity is called a deferred annuity and has two main phases: a savings phase, when money is invested into the account and an income phase, when the plan is converted into an annuity and payments are received.

A deferred annuity is not taxed until the income phase begins and it also provides a death benefit to the survivor(s) of the annuitant. As this type of annuities is designed primarily as retirement savings accounts, the annuitant may owe a 10% penalty tax in addition to ordinary income taxes if principal, earnings or both are withdrawn prior to age 59½.

Depending on the way the investment is made the deferred annuity earnings can be either fixed (your money earns interest at a fixed rate that will never drop below a minimum rate guaranteed by the issuing company and is tax-deferred until withdrawals are made) or variable (you choose investments from a pre-selected list of funds called sub-accounts inside of a variable annuity and the returns will vary depending on the underlying performance of the chosen investments).

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