You can choose different ways to have your money grow
3 types of deferred annuities
What is a deferred annuity?
Find out how a deferred income annuity works – and if it’s the right choice for your retirement
It takes decades of hard work to build up retirement savings. But at some point, you'll want to stop working and enjoy the fruits of your labor. Before that day comes, you have to think about two important questions:
How will you turn your retirement savings into a monthly income you can live on?
How can you make sure your retirement income doesn’t run out?
These are real concerns for many Americans. Research from the Insurance Retirement Institute found that almost half of workers – 44% – don’t believe they’ll have enough income to last throughout retirement.1 Annuities can help by taking a sum of money and turning it into a predictable stream of income payments guaranteed to last for the rest of your life. There are several types of annuities, and most are actually deferred. That simply means the annuity doesn’t start paying out right away: your income payments are deferred for at least one year. Otherwise, it would be an immediate annuity.
In a nutshell: A deferred annuity is a binding contract with an insurance company to help your money grow tax-free for a period of time, then convert it into a series of smaller, guaranteed income payments.
Some people refer to annuities as “private pensions” because the contract can be made to work like a pension, providing a regular stream of monthly income that lasts for a set number of years, or even the rest of your life. There are several types of annuities to choose from, depending on how you want your money to grow and get paid out as income. We'll explore some of those options as we go into more detail about how deferred annuities work.
A deferred annuity has two phases
These contracts have two primary parts: the accumulation phase and the payout phase. During the accumulation phase, you pay into the annuity and your money grows tax-deferred, allowing your funds to grow more quickly. The payout phase begins when you start receiving income payments from the insurance company.
You can choose different ways to pay into an annuity
Generally speaking, there are two ways to make premium payments into a deferred annuity: single premium or flexible premium. With a single-premium deferred annuity, you make a one-time, lump-sum payment, and the entire amount grows over time until you decide to withdraw. This can be a good option for people who have just sold a large asset, such as a business or property, and want to invest a chunk of that money to secure future retirement income.
A flexible-premium deferred annuity is more like a savings or retirement account that you gradually build up over time with multiple periodic payments. As the name implies, this option gives you lots of flexibility. For example, you could decide to pay in a certain amount in each paycheck, make annual payments that vary based on your bonus – or do both.
Fixed annuities
A fixed annuity is the most predictable type of annuity because it pays a guaranteed, fixed rate of return on the premiums you contribute. When you’re ready to take income, you receive a guaranteed stream of payments.
Variable annuities
While it doesn't offer as many guarantees as fixed deferred annuities, a variable deferred annuity lets you take advantage of the highs and lows of the financial market. Any earnings are tax-deferred until you’re ready to start receiving income payments.
Fixed index annuities
This can combine premium protection with market growth potential not available from a fixed annuity by providing a minimum guaranteed interest rate combined with potential growth tied to a specific index.
Choose different ways to have your money paid out
Deferred annuities give you lots of options, and the choices don’t stop when it comes to how long you want to receive income. A Guardian deferred annuity actually gives you five different ways to take income payments from your annuity:
Life Annuity without Guaranteed Period — This is also called a “Straight life” annuity. Payments are made for the lifetime of the annuitant (i.e., the annuity owner), but that’s all. This method provides the highest regular lifetime payouts, but income stops when the owner passes away, and there’s no payment made to beneficiaries. So, for example, if the owner passes away in the first years of taking income, the total payout could be much less than what was paid in.
Life Annuity with Guaranteed Period — Annuity payments are made for the annuitant’s lifetime. But, if the annuitant dies during a selected “guaranteed period” (which can be 5 to 30 years, subject to age restrictions), benefit payments continue to be made to a beneficiary for the remainder of the guaranteed period.
Period Certain Only (5 through 10 Years) — This option provides annuity payments for a set amount of time between 5 and 10 years, and payments continue even if the annuitant dies before the period certain ends.
Joint Life Annuity with Survivor Benefit — Annuity payments are made for the life of two individuals (called joint annuitants, who must be spouse). This option can be issued without a guaranteed period, life with a guaranteed period of 5 to 30 years.
There are certain age limitations, qualifications, and other conditions that you should understand before signing an annuity insurance contract. Different providers offer different ways to take income from a deferred annuity, and each method offers different advantages and disadvantages depending on your specific needs and financial goals. It's also important to note that deferred annuities typically come with surrender charges that can be quite steep if you want to make any modifications after your contract has been signed.
Optional riders provide added flexibility and benefits
Deferred annuities can offer a variety of rider options for added benefits, such as guaranteed minimum payments. These come at an additional cost, but they can provide valuable advantages depending on your individual needs and preferences.
For example, a guaranteed minimum income benefit rider can ensure you’ll have a set amount of income for the rest of your life, regardless of the investment performance of the funds in your annuity. When you customize your deferred annuity with the right riders, you can further enhance its benefits to better suit your financial goals and retirement needs.
Tax advantages and considerations
Deferred annuities offer a number of potential tax advantages. For one thing, unlike retirement accounts, there are generally no limits on how much you can pay into an annuity, making it a good choice for those who are maxing out other retirement savings vehicles. Like an IRA or 401(k), the earnings within the annuity grow tax deferred. However, when you withdraw funds from a deferred annuity, you will likely have to pay income taxes on all interest and investment earnings above your initial investment.
If you make an early withdrawal or cancel the contract before age 591/2, the IRS may impose a 10% early withdrawal penalty and income tax on the gains. Additionally, surrender charges may apply if a lump sum withdrawal or contract cancellation is made within the contract’s stated surrender charge period. It’s important to discuss these tax implications and other considerations with your financial advisor when planning your retirement finances and deciding if a deferred annuity is right for your needs.
Potential drawbacks of deferred annuities
While deferred annuities offer numerous benefits, like any investment vehicle, there can be some potential drawbacks as well. These can include:
Limited financial flexibility
Because annuities are designed to provide a guaranteed income stream in the future, there are restrictions on how you can access funds before the annuity starts paying out. For example, there are typically early withdrawal penalties which make it hard to access money in an emergency.High fees and charges
These fees can include administrative fees, surrender charges, mortality expenses, and commissions which may limit your investment returns, so it’s important to assess the costs of a deferred annuity in relation to its benefits before investing.Complexity
Deferred annuity contracts are usually lengthy documents that can be difficult to comprehend, especially for a variable annuity or fixed indexed annuity. So, working with a financial advisor who can help you fully understand the features, benefits, and potential drawbacks of the deferred annuity contract you're considering is essential.
Is a deferred annuity right for you?
A deferred annuity can be an important part of your retirement planning strategy and an added way to save money on a tax-deferred basis along with 401(k) plans, whole life insurance cash value, and other assets. But unlike those vehicles, it can guarantee that no matter how long you live, you won’t outlive all your annuity income. If that’s something you’re concerned about, we suggest talking to a financial professional to see if a deferred annuity could be right for your needs.
Get help figuring out if deferred annuities are right for your retirement goals
Have an annuity with Guardian?
Let’s help you find what you need.
Need more information?
Resources to help you learn and compare.
Starting to think about retirement? Try our retirement planner
Do you need income now or later? Learn about immediate and deferred income annuities
What’s the definition of an annuity?
Other products you may be interested in
Life Insurance
If people depend on your income for support, what will happen to them if something happens to you? Life insurance can be a vital source of financial support.
Disability Insurance
If you're unable to work due to injury or medical condition, where will you get income to live on? Disability insurance can help support your family when it's needed most.
Dental Insurance
Dental insurance helps keep your mouth and body healthier by covering regular preventive care. And it helps cover costs whenever you visit the dentist – even if you need major work.