Immediate vs. Deferred Annuities

If you buy an annuity, you can convert your assets into a stream of income and receive that income in regular payments during your lifetime. This feature, known as annuitization, distinguishes annuities from other individual retirement plans, such as traditional IRAs, which require you to make required withdrawals after you turn 70½, but don’t provide a guaranteed lifetime income. But there is one caution: receiving your annuity income depends on the financial ability of the company issuing the contract to make the payments.

Annuities also differ from other retirement plans because you can choose between an immediate annuity if you want the income right away, and a deferred annuity if you want to build your account value over time and convert it to income in the future.

immediate annuities


When you buy an immediate annuity, you make a single lump-sum payment and set the starting date for the payout to begin sometime within the next 13 months — generally sooner rather than later. The term, or period of time that income will be paid, and the amount you’ll receive are laid out in the annuity contract.

With an immediate annuity, you control the term: You can choose income for your lifetime (known as a life annuity), or for your lifetime and that of another person (known as a joint and survivor annuity). You can add a guaranteed period to either of these lifetime income payment options so that your beneficiaries will receive the payments remaining in the guaranteed period if you die before the end of the period. You can also choose time-specific or amount-specific payout alternatives.


The size of the monthly payment you’ll receive is set by the annuity provider based on:

  • The amount you use to buy the annuity, or annuity principal
  • The payout option you choose
  • Whether the annuity is fixed or variable
  • Personal factors, including your age and, if it’s a joint and survivor annuity, the age of the other person


While you can buy a deferred annuity at almost any time, including after you retire, remember that deferred variable annuities need to accumulate earnings for an extended period if they’re going to provide a substantial level of income.


Immediate annuities offer some advantages that can make them attractive choices for retirement income. Specifically, they can help ease the fears people may have about managing a diversified investment portfolio or, even more scary, of outliving their resources.

For example, someone who has just received a large sum of money — an inheritance, a bonus, or profits from selling a business — but really needs a steady source of income can choose an immediate annuity. In addition, if you expect a lump-sum pension or 401(k) distribution, you may want to consider an immediate annuity as a way to convert your money into a stream of income you can’t outlive.


Many people choose a fixed immediate annuity for the predictable payments it promises, based on the issuer’s claims-paying ability. Other people prefer variable immediate annuities because they offer the potential for increased income in the future. The risk with a variable annuity, however, is that future returns aren’t predictable or guaranteed and could drop rather than increase.

In choosing a fixed immediate annuity, the decision usually comes down to which highly rated provider will guarantee the largest regular income for the term you select. Income amounts vary because companies use different annuity purchase rates for determining their payments.

For example, a 55-year-old widow, who buys a $100,000 immediate annuity and wants to receive monthly payments for the rest of her life, might discover that her potential income could vary by as much as $150 a month depending on the provider. If she lived for 35 years — to age 90 — the difference could amount to more than $65,000.

In choosing a variable immediate annuity, which guarantees income for life in amounts that will vary to reflect the performance of the investment portfolios you select, you look at a number of factors, including the investment portfolios in the contracts you’re considering and the annual expenses of the contracts. Remember that the higher the fees are, the greater the return the investment portfolios must produce to meet your income expectations.

deferred annuities


A deferred annuity gives you the opportunity to build your retirement savings over a period of years. What you’re deferring is the time at which you begin to receive income and the taxes that would have been due on earnings in your contract. In the period between signing the contract and converting your accumulated assets to a revenue stream, your principal is in either a fixed account, variable investment portfolios, or both.

Unlike an immediate annuity, which you must purchase with a lump sum, you can build your deferred account with a lump sum, a series of payments over time, or sometimes both. The ability to combine one-time and periodic premiums may give you added flexibility in building a larger retirement resource. But that alternative isn’t always available.

You continue to have access to your money in a deferred annuity until you convert your accumulated assets to a revenue stream. This means you can make some annual withdrawals, or surrender the contract entirely, getting back its current value minus any surrender fees. But if you do withdraw, the money will be gone, and your retirement account will be reduced. You may also have to pay an early withdrawal tax penalty if you’re younger than 59½.


Deferred annuities may be especially appealing if you’ve put as much into your employer’s salary reduction plan and a traditional individual retirement account (IRA) as you can but want to put away more for your retirement. And if you aren’t earning income, a deferred annuity is the only way to make a tax-deferred retirement investment with money from other sources.

There are no federally imposed annual limits on the amount you can contribute to a nonqualified deferred annuity — as there are with employer sponsored plans and IRAs — so you can contribute more when you have more on hand, for example as the result of a big bonus, a short-term, high-paying job, or other windfall.

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