Conditions of When to Purchase a Deferred Annuity

Deferred annuities are a popular tool for retirement planning. The word deferred applies to two different aspects of the Annuity. For one, the payouts are deferred. Simply put, that means that payments from the annuity are not being taken (the annuity is not annuitized). In addition, it refers to the tax aspect of annuities, since income taxes are deferred until the money is taken out.

Who might consider purchasing a deferred annuity? Those in or nearing retirement may wish to consider a deferred annuity if they meet the following conditions:

  1. They have the time to let the annuity grow. Since most deferred annuity contracts have a specified surrender schedule, making sure you have the time on your side to let the annuity mature would be important for you to consider.

  2. Would like tax deferral on an investment.

  3. If an individual is looking for a fixed rate of interest, a deferred fixed annuity may make sense.

  4. If an individual is looking for upside potential with downside protection, an indexed annuity may make sense.

  5. If an individual is looking for stock-market risk and returns with tax deferral, a variable annuity may make sense.

  6. If an individual is looking for specific features or riders, such as income guarantee benefits, death benefit guarantees, and/or long term care riders, a deferred annuity may make sense.

Deferred annuities should be carefully considered as a part of an overall financial plan. They may not always make sense for every individual. Carefully consider the liquidity of other assets before purchasing any annuity.

Annuities are best suited for long term investors.  Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax.  Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time.  Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.