What is deferred annuity?
Deferred annuities are used to replace existing retirement plans. These types of plans provide the benefits of a pension and the tax-deferred options of an investment plan. With a fixed annuity, a predetermined interest rate is locked for an initial period usually around ten years. After that, variable interest rates can be adjusted every year. Fixed deferred annuities give you a secure minimum interest rate, no matter of market fluctuations.
Deferred annuities allow you to invest in the present. This creates a safety net for retirement planning because your money is available to you when you need it. By investing in deferred annuities, your dependents will receive a lump sum of money in their hands when they require it. Your future income is protected until your death or disability, whichever comes first. The payments made on the account are guaranteed to continue until your death or disabling.
How does a deferred annuity work?
In general, deferred annuities are more expensive than a regular annuity because of the variable payments. However, you are only taxed on the interest accumulated in the account. You are not taxed on the initial payments. So technically, the more money you contribute the less income tax you will be required to pay. Also, you will get immediate access to your money. Unlike other types of plans, your future income remains unaffected by the amount invested.
Apart from the immediate financial benefit, deferred annuities give you additional security in the form of a tax-deferred compensation. This means that the amount you would receive in retirement depends on how much you have saved over the years. As your saving increases, you get to choose more benefits. If you need more than your income to fund your retirement savings, your annuity will be able to provide it.
Deferred annuities are very useful for those who expect to retire at a later age. When we retire, we anticipate getting a pension. However, if we don’t have any pension when we retire our last paycheck will be a lump sum. Deferred annuities provide the guaranteed retirement income by paying a lump sum benefit after we retire.
There are two basic options in deferred annuities.
One is completely tax deferral, while the other is tax deferred. In a completely tax-deferred basis, there is no immediate tax liability upon distribution. Your contributions remain tax-deferred until you withdraw them. However, any earnings that you make will be taxable during the period of deferred receipt.
In tax-deferred annuities, the retirement benefit is paid directly to the covered entity. The benefit is reduced by the amount of the withdrawal charges. The withdrawal charges are based on the current age of the covered entity and the current rate of interest applicable to the plan. At the end of the accumulation phase, any residual cash is available to the investor. At the end of the payout phase, any remaining funds are returned to the investor.
There are different types of deferred annuities. Some are based on market index rates. While others may use particular investment risk factors. The two most common deferred annuities are the variable annuities and the indexed annuities.
Variable annuities follow the rules of deferred annuities. The initial purchase price of the annuity is made with a lump sum of money. The lump sum is invested by the plan in an appropriate market. The lump sum is usually not guaranteed to return a profit. If the market falls, the deferred annuities may have to be redeemed.
What is the benefit of a deferred annuity?
One of the advantages of deferred annuity contracts is that they provide tax deferred payments to the beneficiary, even when the retiree dies before the payout date. This can be very important for families who need the income from the retirement benefits. These contracts may also allow parents of former employees to split the payments between them when the employee has retired. The payments may be topped up if the employee continues to work until he or she has reached the retirement age.
Another advantage of deferred annuities is that they may provide better financial protection than are all direct pay plans, as they give the beneficiary time to accumulate a certain amount of money. In a pure savings plan, once the annuitant retires the money cannot be taxed. But in mutual funds, once the investor has accumulated a specific minimum amount, he or she is able to defer the tax on the payout.
Deferred annuity contracts give the investor the opportunity to set both the start date and the end date of his or her payments. If the start date is missed the payments will begin at the end of the contract. If the start date is advanced the payments begin on the new start date. Generally most insurance company contracts begin with the start date at the lowest dollar value and gradually increase the amount to reach a level that is close to what the insurance company will achieve at the end of the term.
