There is an old saying: ‘As you sow, so shall you reap’. Taking a leaf out of this in the world of investing, one can infer that the returns offered by a pension or retirement scheme is a function of the investment(s) made in the past.
Under a retirement plan, policyholders make small and regular investments in the younger days to reap fruits later – years or sometimes decades later.
Deferred annuity adheres to this doctrine where an investor is paid a lump sum or a regular income at a later stage in return for small doses of investment made in the past.
What is deferred annuity?
A deferred annuity is an insurance contract that promises to pay annuity to an investor owner either as a lump sum or a regular income at a future date. People frequently buy deferred annuities to supplement income streams in retirement.
Deferred annuity enables policyholder to make premium payment now with the payout given later.
A deferred annuity accrues interest and grows in value, enabling policyholder to receive a bigger pay out at the time of withdrawals. There are several types of deferred annuities including single premium, flexible premium, fixed, variable and indexed deferred annuity.
Deferred annuities are divided into a number of categories based on pay-out options such as lump sum and systematic withdrawals.
How it works?
When a policyholder buys an annuity, and opt for receiving payments within one year, it is referred to as immediate annuity. On the other hand, when you opt for waiting for annuity, it is known as a deferred annuity.
Since deferred annuities are disbursed after a gap of several years, it becomes bigger in size because the interest gets added to it.
Are they considerd a good invesment?
The deferred annuities are a useful retirement planning tool for those who want a guaranteed income stream in the future and are open to accepting some restrictions on their access to the funds during the accumulation phase.
It is vital to consider the terms and fees associated with a deferred annuity before deciding to buy, for instance, most annuity contracts impose strict limits on withdrawals. These withdrawals are subject to surrender fee charged by the insurer.
In conclusion, we can say that deferred annuity enables investors to defer income payments until they reach a certain age, while the exact date can be chosen well in advance.