What is a Deferred Annuity?

By purchasing a deferred annuity, you will be able to provide yourself with a regular income upon reaching retirement age. This type of retirement plan has several unique features that makes it appealing to those that are investing for retirement. Here are the basics of the deferred annuity and how it works.

Deferred Annuity

A deferred annuity is a type of contract with an insurance company that is designed to pay you an annuity payment once you would like to receive them. You are essentially going to be paying for the annuity at one point and then electing to receive payments at a later date in the future. Many people choose to pay for a deferred annuity with small payments over their working life. Other people will take a lump sum and purchase a deferred annuity with the plans of receiving payments when they retire.

Investing

You will be making some type of payment to the insurance company in order to fund this annuity. With part of that money, the insurance company is going to invest into the financial markets. Depending on which type of annuity you get, the insurance company might take care of the investing for you or you could be in charge of the investment decisions. With a fixed annuity, the insurance company is going to guarantee you a specific rate of interest over the life of the annuity. If you choose a variable annuity, you will be in charge of selecting the individual investments for your annuity. The interest rate that you receive will depend on how the investments perform.

Tax Benefit

When you invest your money into an annuity, it is allowed to grow tax-free. You will not have to pay any taxes on the earnings from your investments until you start taking payments in the future. At that point, the money that you receive will be treated as regular income and you will be charged at your marginal tax rate.

Security

Many individuals choose to invest in a deferred annuity because of the security that it can provide for their retirement plan. You are essentially putting aside a certain amount of money so that you will be able to receive a regular income when you retire. Some annuities will guarantee a certain payment to you as long as you continue to make your premium payments for the life of the annuity.

Although this is a fairly safe investment, you should be aware of a potential drawback. You are going to be investing in an insurance company. Insurance companies have been known to go out of business on occasion. If you do not choose an insurance company that will be around when you retire, you could end up losing all of the money that you have contributed to the annuity. Make sure that you check out the financial ratings of the insurance company before you choose to get involved with one of their deferred annuities.

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