Immediate Annuity vs. Deferred Annuity: A Detailed Guide

Shawn Plummer

CEO, The Annuity Expert

Choosing between an immediate and deferred annuity can feel overwhelming. But with a people-first approach, this guide aims to simplify the choices, help you understand what distinguishes one from the other, and identify the ideal annuity for your financial needs.

Confused About Annuities?

Are you new to annuities and unsure where to begin? Visit our Annuity Learning Lab for expert guidance and insights.

What Is an Immediate Annuity and How Does It Work?

An immediate annuity is, as its name suggests, an annuity that begins payments immediately or within a short time after a lump sum is paid. Here’s how it works:

  1. Initial Investment: You pay a lump sum to an insurance company.
  2. Immediate Payments: You start receiving periodic payouts almost immediately.

Example: Sarah, a recent retiree, wants to ensure she receives a steady income immediately. She invests in an immediate annuity. Within a month, she starts receiving monthly payouts.

Difference Between Immediate Annuity And Deferred Annuity

What Is a Deferred Annuity and How Does It Work?

A deferred annuity, on the other hand, allows earnings to grow tax-deferred for several years before payments begin.

  1. Initial Investment: Like the immediate annuity, you invest a sum.
  2. Growth Period: Your money grows without tax implications until you decide to start the payouts.
  3. Payouts: Payments commence at a future “start date” you choose.

Example: Consider John, who’s 45 and planning for retirement. He invests in a deferred annuity. His money grows tax-deferred for the next 15 years. At 60, he begins receiving his payouts.

Immediate Vs. Deferred Annuity With Guaranteed Lifetime Withdrawal Benefit

Difference Between Immediate and Deferred Annuities

The main difference between immediate and deferred annuities is the start date of payouts. With immediate annuities, payments start almost immediately after the initial investment. Deferred annuities, however, allow the investment to grow for a while before payouts begin.

Immediate Annuitization vs. Immediate Lifetime Income Riders

Immediate annuitization is when one converts their lump sum into immediate periodic payments, typically for life. It’s irrevocable, meaning once chosen, it can’t be reversed.

Immediate lifetime income riders, however, offer the same immediate payouts but with added flexibility, like the potential for increasing payments over time.

Example: Lisa opts for immediate annuitization. She cannot change or reverse this decision later. David chooses an immediate lifetime income rider, giving him the potential for increasing payouts.

Difference Between Immediate And Deferred Annuities

Deferred Annuitization vs. Deferred Lifetime Income Riders

Deferred annuitization is letting your initial investment grow before starting fixed payments in the future.

On the flip side, deferred lifetime income riders not only offer a future payout but also guarantee certain benefits like guaranteed lifetime withdrawal benefits or a lump sum death benefit.

Example: Robert chooses deferred annuitization. He begins his payouts at 65. Karen opts for a deferred lifetime income rider, ensuring her beneficiaries get a lump sum death benefit.

Pros and Cons of Immediate vs. Deferred Annuities

  1. Immediate Annuity
    • Pros: Immediate income, simple structure, guaranteed payouts.
    • Cons: Irrevocable, does not earn interest, limited flexibility.
  2. Deferred Annuity
    • Pros: Potential for growth, tax-deferred earnings, flexibility in start date.
    • Cons: Payments don’t start immediately and can be complex with various riders.

Example: Sam, needing immediate income post-retirement, finds the immediate annuity more beneficial. Meanwhile, young Emma, aiming for growth, leans towards a deferred annuity.

Difference Between An Immediate Annuity And A Deferred Annuity

Who Needs Which Annuity and Why?

  • Immediate Annuities are ideal for those seeking an instant, consistent income source, especially post-retirement.
  • Deferred Annuities cater to individuals wanting their wealth to grow, targeting a future income, possibly pre-retirement.

Example: A retired couple, Mark and Sue, could utilize an immediate annuity for instant income. Their daughter, Nina, in her 30s, might prefer a deferred annuity for its growth potential.

Next Steps

Choosing between an immediate and deferred annuity hinges on your current financial situation, needs, and future plans. Understand the nuances – from immediate annuitization vs. deferred annuitization to lifetime riders and their offerings. Your choice could spell the difference between immediate financial security and long-term wealth growth. Always prioritize your needs and consult a financial expert to make an informed decision.

Deferred Annuity Vs. Immediate Annuity

Request A Quote

Get help from a licensed financial professional. This service is free of charge.

Contact Us

Frequently Asked Questions

What is a guaranteed lifetime withdrawal benefit, and how does it work?

A guaranteed lifetime withdrawal benefit is a feature of annuities that provides a guaranteed income stream for life, regardless of market performance. It works by setting a minimum withdrawal amount the investor can receive each year, even if the actual investment returns are lower.

How do immediate and deferred annuities with guaranteed lifetime withdrawal benefits provide income during retirement?

Immediate and deferred annuities with guaranteed lifetime withdrawal benefits provide income during retirement by offering a regular stream of payments for life or a specified period, which can be chosen at the time of purchase. The payments are based on the value of the annuity and other factors, such as the age and gender of the annuitant.

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. 

Scroll to Top