What is an annuity?
An annuity is an investment that provides you with a regular fixed income for a lifetime or a specific number of years. There are two types of annuities available: deferred annuities and immediate annuities. For either type there are fixed rate annuities that guarantee a certain rate on your investment and variable rate annuities that offer more options. The right annuity for you depends on your specific needs.
Deferred vs. Immediate Annuities
A deferred annuity is a type of personal retirement account that allows you to grow your assets on a tax-deferred basis for long-term goals, like retirement. There are two phases to a deferred annuity: the saving and investing phase, when your assets are invested for potential growth, and the retirement income phase, when you can choose how and when to receive income. There are two types of deferred annuities: fixed deferred annuities and variable deferred annuities.
Immediate annuities are annuity contracts that start the payout stage immediately after the owner purchases the contract. An immediate annuity does not actually go through an accumulation stage because of this immediate payout feature. Each payment that is made from an immediate annuity is a return of part of the investor's original investment and interest that is earned during the payout period.
Difference between Deferred and Immediate
The key difference is that a deferred annuity is a long-term vehicle, designed to accumulate assets over time. When you are ready to receive income, usually at retirement, you can convert your savings to a steady stream of income that meets your needs. Immediate annuities are designed to begin making annuity payments right away or within a short time afterward. In addition, deferred annuities may be purchased with a lump sum or multiple contributions. An immediate annuity is usually purchased with a single lump sum contribution.
Fixed vs. Variable Rate Annuities
The interest your investment earns can be based on a fixed rate or a variable rate based on stocks, bonds and money market performance. There are benefits and risks associated with each, so make sure you understand your options.