Although deferred and immediate annuities are both investment products issued by an insurance company and they may seem very similar on the surface, there are a number of important distinctions that must be made between the two. Take a look at the following factors for an explanation of these differences.
Length of the Accumulation and Payout Periods
While a deferred annuity has an extended accumulation period an immediate annuity has virtually no accumulation period. Under a deferred annuity contract the annuitant deposits a sum of money monthly into the insurance product. These funds are invested by the company and the annuitant is promised a return in the future which can be withdrawn as a monthly payout, a lump sum or a combination of these two options. The accumulation period of a deferred annuity usually spans several years as this is used as a key part of retirement planning. An immediate annuity on the other hand is started with a lump sum investment and the payout starts within the next 30 days. There is no accumulation period here, because the money is placed all at once in exchange for a safe investment and the promise of continued monthly cash flows.
Tax Benefits are Different
Deferred annuities usually attract deferred income tax benefits, which are a popular feature of the product. Immediate annuities do not have lengthy accumulation payments so they do not offer any tax benefits.
Issue Age Limitations
While a deferred annuity can be started at birth (a parent can start one for a child) or more commonly when the annuitant reaches legal age, an immediate annuity has an issue age limit of 59.5. This stipulation is implemented to control how they are marketed by insurance companies. Although an immediate annuity works very much like a fixed deposit in the sense that it is a lump sum of money invested with the promise of a monthly rate of return, it is not the same, because it is issued by an insurance company. The age limit restriction reinforces that it is to be used as a retirement product and not as a general form of investment.
Contracts May Be Cancelled or They May Be Irrevocable
Another major difference between an immediate and deferred annuity is that a deferred annuity can be cancelled (for a fee of course) while an immediate annuity is irrevocable. This is a serious difference and it is important to understand the terms of any contract you enter into so you are aware of your options in the event that you want to exit the agreement or withdraw your money.
There are several differences between deferred and immediate annuities that can influence your decision to choose one over the other, so be sure to get all the information and think carefully before you decide what is right for you.