What Is A Deferred Annuity? How Do They Work? The Pros and Cons

Shawn Plummer

CEO, The Annuity Expert

There are many investment opportunities in the world, one of which is the deferred annuity. People have many questions about it, but we can explore it thoroughly and try to understand it better. So let’s dive in and leave no questions unanswered.

What is a Deferred Annuity?

At its core, a deferred annuity is an insurance product designed to help individuals secure a steady income stream during their retirement years. The name “deferred” comes from the annuity payments being “deferred” or delayed until a future date. In contrast to immediate annuities that start payouts right away, deferred annuities provide a longer-term investment perspective.

These annuities are the opposite of immediate annuities.

How Do Deferred Annuities Work?

Deferred annuity contracts work on a simple premise: you invest money now, it grows over time, and you get to reap the rewards later. There are two main phases in a deferred annuity contract:

Accumulation Phase

During this phase, your money grows tax-deferred. You contribute to your annuity, and your investment compounds over time, free from immediate taxation.

Annuitization Phase (Distribution Phase)

At a pre-determined date, you start receiving payments from your annuity. The payment amount depends on factors like the initial investment amount, the duration of the contract, and the growth rate.

The Basic Types of Deferred Annuities

There are three primary types of deferred annuities you might encounter:

Fixed Deferred Annuity

Fixed deferred annuities promise a guaranteed rate of return. It’s a safe harbor for those who prefer stability over volatility.

Variable Deferred Annuity

In variable deferred annuities, the returns depend on the performance of the underlying investment options, usually mutual funds. It involves a higher risk but also offers a chance for higher returns.

Fixed Indexed Deferred Annuity

Fixed-indexed deferred annuities tie your returns to a specific market index, like the S&P 500. As a result, it provides a unique blend of safety and potential for growth.

Deferred Annuity

The Pros and Cons of a Deferred Annuity

Like any other financial product, deferred annuities have their benefits and drawbacks.


Deferred annuities offer tax-deferred growth, a guaranteed income stream in retirement, and a death benefit for beneficiaries.


On the flip side, they may come with high fees and early withdrawal penalties, and their returns may not keep up with inflation.

Tax Deferred Annuities

Deferred Annuity Calculator

Use this deferred income annuity calculator to forecast your retirement income in the future starting today.

The Deferred Annuity Formula

Calculating your deferred annuity returns involves a simple formula: FV = P * (1 + r/n)^(nt). Here, FV is the future value of your annuity, P is the principal amount, r is the annual interest rate, and n is the number of times that interest is compounded per year. T is the number of years the money is invested for.

Deferred Annuity vs. Immediate Annuity

The payout schedule is the primary difference between a deferred annuity and an immediate annuity. Immediate annuities start paying out soon after the investment, while deferred annuities start at a later pre-determined date.

Deferred Income Annuity: A Special Type of Deferred Annuity

A deferred income annuity, or longevity insurance, provides a guaranteed income

stream starting at a future date, often when the annuitant reaches an advanced age (like 80 or 85). It’s like a safety net for those who worry about outliving their savings.

Income Annuity vs. Deferred Annuity: The Key Differences

The critical difference between an income annuity and a deferred annuity is its purpose and payout structure. An income annuity (often synonymous with an immediate annuity) is designed for immediate income needs and starts paying out soon after the investment. Meanwhile, a deferred annuity is for future income needs, and it begins payouts at a later date.

Deferred Annuity At A Glance

Fixed Index
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


Deferred annuities are a compelling vehicle for long-term financial planning, especially for those eyeing a steady retirement income. However, like every financial decision, it’s crucial to consider your specific needs, risk tolerance, and financial goals. Hopefully, this guide has illuminated the path for you to make an informed decision about deferred annuities.

Whether considering a fixed indexed deferred annuity or exploring various deferred annuity contracts, remember that knowledge is your most valuable asset. Don’t hesitate to seek professional advice, and continue learning to stay afloat in the ever-changing financial ocean. Happy investing, folks!

Remember, the deferred annuity is not a one-size-fits-all solution, but with the proper understanding, it can become a powerful tool in your financial toolbox. So, whether you’re planning for retirement or want to leave a legacy for your loved ones, understanding deferred annuities is a step in the right direction.

Deferred Annuity

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Frequently Asked Questions

What is a deferred annuity?

A deferred annuity is an investment vehicle that allows you to save for retirement. You make contributions to the annuity, which grows tax-deferred. You can withdraw a lump sum or receive income payments when you reach retirement age. There are two types of deferred annuities: fixed and variable.

What is the main difference between immediate and deferred annuities?

An immediate annuity pays benefits immediately, while a deferred annuity pays benefits at some point in the future. The main difference between the two is when you start receiving payments. Another difference between the two is how they grow. An immediate annuity doesn’t grow, while a deferred annuity does. This growth is tax-deferred, meaning you don’t pay taxes until you withdraw the money.

How are deferred annuities calculated?

The formula for calculating a deferred annuity is future value = present value × (1 + interest rate)^number of periods. For example, if you have $10,000 in a deferred annuity that pays 5% interest and you plan to leave it invested for ten years, the future value of the annuity would be: $10,000 × (1 + 0.05)^10 = $16,105.05

Who needs a deferred annuity?

Deferred annuities are often used by people who are saving for retirement. The tax-deferred growth can make them an excellent way to grow your nest egg. And, since you don’t start receiving payments until later, you don’t have to worry about the effects of inflation on your purchasing power. Deferred annuities can also be an excellent way to create an income stream in retirement since you can choose to start receiving payments when you expect your other sources of income (such as Social Security) to start declining.

Can you lose money with a deferred annuity?

Yes, you can lose money with a deferred annuity if the interest rate on the annuity is lower than the inflation rate. This is because the purchasing power of your money will decline if it’s not keeping up with inflation. Also, if you withdraw money from a deferred annuity before age 59½, you may have to pay a 10% early withdrawal penalty. And, of course, you could lose money if the company that issues the annuity goes out of business. That’s why it’s important to research an insurer before buying an annuity. You can check an insurer’s financial strength rating at A.M. Best and Moody’s websites.

When should I buy a deferred annuity?

The best time to buy a deferred annuity is when you have the money you won’t need for at least seven years. This will give the annuity time to grow and compound without the risk of having to withdraw the money early. Also, remember that you may want to start taking Social Security benefits at age 62. It could reduce your Social Security benefits if you start receiving payments from a deferred annuity before that. So, you may consider waiting until age 62 to start taking payments from a deferred annuity.

How soon can benefit payments begin with a deferred annuity?

With a deferred annuity, you can choose when you want payments to begin. The most common choice is at retirement, but you can also choose to start receiving payments before or after retirement in as little as 30 days. If you start taking payments before age 59½, you may have to pay a 10% early withdrawal penalty.

What are the basic types of deferred annuities?

There are two basic types of deferred annuities: fixed and variable. With a fixed deferred annuity, the interest rate is guaranteed for a set period, usually 2 to 10 years. After that, the interest rate may change but never be lower than the guaranteed minimum rate. With a variable deferred annuity, the interest rate and your payments can go up or down depending on how the investments in the annuity perform.

How many phases does a deferred annuity have?

A deferred annuity has two phases: the accumulation and payout phases. You contribute to the annuity during accumulation, and the money grows tax-deferred. During the payout phase, you begin taking distributions from the annuity and pay taxes on the money as you withdraw it.

Can I cash out a deferred annuity?

Yes, you can cash out a deferred annuity, but you may have to pay a surrender fee and income taxes on the money. Also, if you withdraw money from a deferred annuity before age 59½, you may have to pay a 10% early withdrawal penalty.

Are fixed deferred annuities safe?

Yes, fixed deferred annuities are safe because the interest rate is guaranteed for a set period. However, the interest rate may change after the guarantee period ends, so some risk is involved.

What is an FPDA annuity?

An FPDA annuity is a flexible premium deferred annuity. This type of annuity allows the policyholder to make additional premium payments on an as-needed basis, up to a specific limit.

What is an SPDA annuity?

A single premium deferred annuity, or SPDA, is a type of investment that can provide financial security in retirement. With an SPDA, you make a one-time payment into the annuity, which is then invested before it pays out.

What is the difference between an income annuity and a deferred annuity?

An income annuity provides regular payments immediately after purchase, offering a steady income stream. Deferred annuity accumulates savings over time with tax-deferred growth, and payments begin at a later date chosen by the investor. The main difference is the payout start time, with income annuity starting immediately and deferred annuity starting later, allowing for potentially higher payouts due to investment growth during the deferral period.

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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