Is a Deferred Annuity for You?

An annuity contract that gives you the option of making periodic contributions, but no withdrawals until an appointed time is called a deferred annuity. Such an annuity may be established early in one’s life. The annuitant deposits contributions on a regular schedule until they retire. At that point, deposits cease and the holder receives regular payments from the plan thereafter.

One advantage of such a plan is that contributions to a deferred annuity are not taxed at the time of deposit; rather, they are taxed when withdrawn. Since the individual is retired at that point, chances are that their tax rate will be lower. The tax advantage can be significant depending upon the amount contributed and when the contributions were made.

Another advantage is that the deferred annuity is a flexible way to save for retirement. Although it makes the most financial sense to contribute regularly by setting up payroll deductions, one can contribute erratically. There are no sales charges which decrease the size of a deposit, and many such plans are set up in such a fashion that the annuitant is guaranteed to recoup at least the total of their contributions. This will hold true even if the underlying investments don’t perform as expected.

An additional benefit offered is that the annuitant does not have to begin receiving payments from such a fund immediately after retirement. They can put off collecting their benefits for however long they feel it is wise to do so. This may be the case if they are already receiving funds from another tax deferred annuity or retirement plan and the additional income would cause them to move into a higher tax bracket. By delaying payment they avoid the additional taxes and ensure that funds are available later in retirement.

Specifics relating to deferred annuity funds differ from nation to nation and it is well worth investigating the specific laws where you live.

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