Deferred Income Annuity: The Personal Pension Plan

Shawn Plummer

CEO, The Annuity Expert

A deferred income annuity, or DIA, is a financial product that allows you to save money for retirement. It is similar to a pension plan in that it allows you to save money over time and receive payments at a later date. This guide will discuss how deferred income annuities work and how they can help you save for retirement!

What Is A Deferred Income Annuity?

A Deferred Income Annuity (DIA) is a deferred annuity that distributes a future income stream during retirement, similar to a pension plan. A deferred income annuity is a contract between a consumer and an insurance company, like an immediate annuity. The consumer gives the insurance company a lump sum of money upfront. In exchange, the insurance company guarantees a pre-determined stream of annuity payments beginning at a later date.

Also known as a Longevity Annuity, Delayed Annuity, or Personal Pension Plan, a Deferred income Annuity works like a pension plan where you invest money now, seeking a guaranteed, lifelong income in the future.

Some deferred income annuities allow additional contributions, and some do not.

The annuity payments to you are irrevocable after the income start date. Irrevocable means no refund or flexibility during the income distribution, so be careful when making your annuity purchase decision.

Qualified Longevity Annuity Contract (QLAC) is a deferred longevity annuity that provides qualified tax savings for older ages.

Immediate vs. Deferred Income Annuity

The main difference between immediate and deferred annuities is when benefits are paid. An Immediate Annuity (SPIA) requires the first 12 months of opening your contract with the income start date. A deferred annuity requires you to start the income phase in the future, typically with a deferral period of at least one year after your initial investment. Typically the deferred annuity can defer your income for up to 30 years. The deferred income annuity calculation offers higher income payments the longer you defer your income start date.

Who should consider a Deferred Income Annuity?

Longevity annuities are not a good annuity solution for everyone, but the pension plan alternative can be the right annuity for a specific type of person, primarily pre-retirees seeking a fixed income in their retirement planning. 

Suppose you’re planning to live on a fixed income for essential expenses in retirement. In that case, a longevity annuity might be an excellent financial product to “layer” an additional income stream on top of social security benefits.  

If you want to add additional deposits regularly throughout your career to build a future income stream, a personal pension plan might also be a good fit for you.

In most cases, a longevity annuity owner can solve for their desired amount of future income today, creating a path for the owner to follow.

Have plenty of liquid assets for emergencies if you decide on this annuity purchase.  Remember, you’ll be stuck with the issuing insurance company for a long time, so ensure the financial strength is strong.

Deferred Income Annuity Pros and Cons

Income RidersDeferred Income Annuity
Guaranteed income for lifeGuaranteed income for life or fixed period
Flexibility to start/stop income streamTax-favored withdrawals on nonqualified annuities
Potential paycheck increases for inflation.No additional fees
Costs range from no cost to 1.25% annuallyIrrevocable payments; No refunds
Potential to earn interestCan be surrendered before receiving income
Future income guaranteed todayCan not be surrendered after receiving income
Can be surrendered or cashed inEarns approximately 1% interest annually
Lump-Sum Death BenefitNo liquidity
Help with long-term care costsNo death benefit or series of payments
Standard liquidityCan not help healthcare costs

The Pro’s

  • In some cases, the annuity policy can generate higher payout rates for you than an income rider (variable annuity, fixed annuity, fixed indexed annuities) will.
  • The annuity payments to you are guaranteed. You can choose how often you collect your retirement paychecks, typically monthly, quarterly, semi-annually, or annually.  
  • You can have peace of mind knowing there’s consistent income as if you were working during retirement.

The Con’s

  • It offers an irrevocable stream of retirement paychecks, which means once the income start date has begun, there’s no turning the annuity payments off.
  • Little to no regular liquidity features like fixed index annuities or variable annuities.
  • Sometimes there’s no death benefit, such as a life annuity.
  • The return rate is low, and typically there is no cash value to grow during the deferral period.

Differed Income Annuity Payouts

Life Income

You receive guaranteed income for as long as the Annuitant lives, but with no payments after the Annuitant’s death. This option should not be chosen if you want someone to receive payments after the Annuitant’s death.

Joint and Contingent Life Income

Income payments continue for as long as the annuitant or contingent annuitant lives. Thus, the joint-life income amount will be paid in full while the Annuitant is alive.

If the Annuitant dies before the contingent Annuitant, payments will continue at the rate you requested in your application and be paid for as long as the contingent annuitant lives.

Payments will cease at the death of both the Annuitant and the contingent Annuitant.

Income for a Fixed Period

Payments are guaranteed for the number of years and months chosen in the application. If the Annuitant dies before the end of the fixed period, a death benefit, consisting of a series of payments equal to the commuted value, will be paid. The death benefit recipient may elect to receive the remaining guaranteed annuity payments, as scheduled, instead of the commuted value.

Life Income with a Guaranteed Period

You are guaranteed income payments for as long as the annuitant lives. However, if the Annuitant should die during the guaranteed period you selected, you or your beneficiary will receive the remaining guaranteed payments.

Life Income with Installment Refund

Your payments will begin on the income start date and are guaranteed to continue for the Annuitant’s lifetime.

Suppose the Annuitant dies before receiving the total annuity payments equal to the initial purchase price. In that case, payments will continue to the named primary beneficiary until the sum of all payments equals the original purchase price.

Life Income with a Cash Refund

Your payments will begin on the income start date and are guaranteed to continue for the Annuitant’s lifetime. However, if the Annuitant dies before receiving total annuity payments at least equal to the purchase price, the difference will be paid to the named beneficiary in a lump sum.

Inflation Adjusted (Cost of Living Adjustment)

An optional feature in which you elect a lesser initial income amount upfront with annual increases for inflation.

How Do Deferred Income Annuities Compare?

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
Deferred
Income
Annuity
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo

What Do My Beneficiaries Receive When I Die?

If a Deferred Income Annuity owner dies before annuitizing the contract, the annuity’s balance will be provided to beneficiaries. If the owner dies after receiving payments, the beneficiaries may or may not receive a death benefit depending on the payout selected by the owner.

Helpful tip: Life insurance might be a better option if you want to leave money to your beneficiaries. In some cases, you don’t need to take a medical exam. Instead, use our tool to shop life insurance quotes online, free of charge. Coverage starts at $9.37 per month.

Next Steps

A deferred income annuity can be a helpful way to save for retirement. Understanding how they work lets you decide if this is the right option. Use our free deferred income annuity calculator to get estimates. If you are interested in learning more about DIAs or would like a quote, contact us; we would be happy to help!

What Is A Deferred Income Annuity, And How Does The Personal Pension Plan Work?

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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