Immediate Vs. Deferred Annuities

Deciding between investing in an immediate annuity and a deferred annuity depends on the goals of the investor and his or her age. Annuities are contract investment vehicles between an investor and an insurance company that provides a stream of income immediately or at a later date. Annuities, in general can allow the investor a safe place deposit his money. Those deposits can grow without the burden of paying taxes on that growth until the withdrawal is made.

Annuities allow the investor to withdrawal any monies deposited without sustaining a penalty if they are above the age of 59.5 years old. Money vested in an immediate annuity, can therefore be withdrawn, say on a monthly or periodic basis, chosen by the investor. The amount of the withdrawal is also at the discretion of the investor, given his or her needs.

A deferred annuity is an investment contract which allows the investor to make purchases on a future stream of income and which grows at a particular amount each year. The investor is able “defer” his tax payment for a later date in the future. For example, a “fixed” deferred annuity would be able to grow at 3% every year. If the annuity is purchased with after taxed dollars, then the only amount that is eventually taxed is only on the rate of growth after the initial withdrawal.

Both immediate and deferred annuities can be placed in various sub groups depending on the aversion to risk by the investor. For example, a deferred annuity can be vested in a variable annuity, which would allow the investor the ability to make investments in any number of mutual funds that the particular insurance company makes available. For example, one particular insurance company may specialize in offering “socially responsible” mutual funds – or other funds that adhere to specific criteria for socially responsible investments, such as fair trade or non-military investments. Other mutual funds that may be offered are higher risk international funds. Variable annuities allow the investor to choose the kind of investments and the weight (or the percentage of those investments) determined by his or her level of financial risk.

For example, in a variable annuity, the investor might be able invest 25% of his funds purchases in a high risk international fund, another 40% in a commodity fund, and the rest in a “fixed” rate fund. The rate of growth for each annuity obviously depends on how each of the market segments does. That growth can “defer” taxes until the investor makes his first withdrawal. Another immediate or deferred annuity can be “indexed” annuities, which are instruments which can be specifically linked or pegged to the growth of the market.

The language of the contract can be pre-determined to change from a “deferred” annuity to an “immediate” annuity after some time as passed. Once the change of language is made, the contract begins to deliver an immediate stream of income for the investor. The investor will only pay taxes on the growth of that investment at the time of the withdrawal. Both deferred and immediate annuities pose particular benefits for the investor. Ultimately, making the decision of having an immediate or deferred annuity should should be based on the age of the investor and the immediate and long term financial goals.