Deferred income annuities are an excellent choice for anyone looking for future sources of income that can outlast their lifetimes. Deferred annuity rates can differ depending on the product you choose, and they let you use a lump sum or multiple premium purchases to receive your retirement paycheck and guarantee income at a future date. The date deferred income annuities typically take effect is anywhere from 13 months to 40 years from the purchase date.
The funds you receive from a DIA annuity can help cover your base living expenses and free other retirement incomes for your personal preferences. The longer you defer your income, the greater your retirement income will be. If you use qualified assets to purchase your deferred income annuity, you may purchase it as a Qualified Longevity Annuity Contract, which will provide some potential tax benefits.
Typically, for qualified assets, your deferred income annuity will require minimum distributions (RMDs) by April 1st after you turn 72. You might be able delta these RMDs if you purchase a QLAC up to age 85.
What Is a Deferred Income Annuity?
A Deferred Income Annuity (sometimes referred to as DIA or Longevity Annuity) is a contract with an insurance company promises to pay the owner a certain amount of money at a certain time in exchange for a fee. All at once or each month, the owner can get a certain amount of money. Deferred annuities are becoming more and more popular as a way to get extra money in retirement, like Social Security. When you sign a contract for an instant annuity, the money comes right away.
Choosing a deferred income annuity comes down to preferences above all. These annuities are typically ideal for anyone nearing retirement who wants to guarantee a source of income. However, as with any financial decision, you should consult a professional who you can trust before making a decision.
Deferred Income Annuity Examples
An annuity is a set of payments made periodically over a time. When these payments are made over time, they are called annuities. You can also go through the different types of annuities for fixed retirement income for better understanding. For example, when you pay your mortgage and insurance, they are annuities. An annuity is a payment that is made each month.
Simple Annuity Example: If you have a car loan, you may pay interest on the loan every month, which makes it easy to keep track of how much you owe and how much you earn. The first monthly payment on an auto loan isn’t due for a month, which saves time.
Example of Deferred Income Annuity: Some people buy delayed annuities at the age of 50, 55 or 60 so that when they retire at the age of 70, 75, or even 80, they will have more money to spend. Here, the payment is called a “delayed annuity,” and it takes a long time. A longer time between when you buy annuities and when you get paid makes the value of them more likely to rise. You don’t know how much your annuity will grow when you buy a delayed annuity, so be careful.
Immediate Vs. Deferred Income Annuity
The primary difference between immediate and deferred annuities occurs when you receive benefits. Immediate annuities (SPIA) require your income start date to be within 12 months of opening your contract. Deferred annuities require you to start the income phase at a future date. Before that date, your annuity enters what’s known as an accumulation phase. You can defer your annuity for a period up to 30 years and the deferred income will offer higher income payments the longer you defer your income start date.
Who Should Consider a Deferred Income Annuity?
Longevity annuities are not the correct solution for everyone, but pension plans can be the right annuity product for specific groups of people. For example, pre-retirees seeking fixed incomes for their retirement planning should consider deferred income annuities. If you plan to live on a fixed income, longevity annuities might be ideal so you can add a supplemental income stream on top of your social security benefits.
Also, if you want to add regular deposits throughout your career to build a future income stream, personal pension plans might be the best option. Longevity annuity owners therefore have a few options to create a clear path to financial stability in retirement.
The Pros of Deferred Income Annuities
- Deferred income annuity policies typically generate higher payout rates than an income rider.
- This type of annuity guarantees payments and you can choose how often you collect your retirement payments, whether on a monthly, quarterly, or annual basis.
- Consistent income gives you added confidence in other investment opportunities.
The Cons of Deferred Income Annuities
- Irrevocable stream of retirement paychecks. Once the income start date begins, you can’t turn the annuity payments off.
- Little to no liquidity features involved compared to those found in fixed-indexed or variable annuities.
- There might not be any death benefits involved.
- Return rate is typically low, with no cash value to grow during the deferral period.
It is important that you should know the different types of actuaries their roles and responsibilities with insurance contract. The following describes the various types of payouts associated with deferred income annuities.
As long as the annuitant lives, they receive payouts. However, there are no stipulations for if the annuitant passes away. If you want to specify a beneficiary who would continue to receive payouts in the event of your death, you should not choose this option.
Joint and Contingent Life Income
In this scenario, income payments continue for as long as either the annuitant or their spouse lives. As long as the annuitant or their designated beneficiary lives, the income amount will be paid in full.
If the annuitant dies before the contingent annuitant, the payments will still continue at the rate requested in the application. These payments will be made until the death of both the annuitant and the contingent annuitant.
Income for a Fixed Period
Income for fixed periods guarantees income for a specified period of years and months. If the annuitant dies before the end of the fixed period, a death benefit consisting of the lump sum equal to the commuted value will be paid. The recipient of the death benefit can elect to receive the remaining guaranteed payments instead of the commuted value.
Life Income With a Guaranteed Period
In this structure, you are guaranteed to receive income payments for as long as the annuitant lives, as with any life income option. There is a caveat to this option, though. If the annuitant dies during the guaranteed period selected, you or the beneficiary will receive the remaining guaranteed payments.
Life Income With Installment Refund
In this option, payments will begin on the income start date and they are guaranteed to continue for the annuitant’s lifetime. If the annuitant dies before receiving the total annuity payments, payments continue to the primary beneficiary until the payments equaling the original purchase price are paid in full.
Life Income With Cash Refund
Payments begin on the income start date and continue for the annuitant’s lifetime. If the annuitant dies before they receive the total of annuity payments equal to the original purchase price, the difference must be paid to a named primary beneficiary in a lump sum payment.
One optional feature you can select is an inflation adjusted payment method. In this method you elect a lesser initial income amount with annual increases for inflation.
Does the Income From a Deferred Annuity Count As Part of Your Gross Income?
After a deferred annuity is annuitized, a portion of it becomes a return of your initial premium. This portion is not taxable. A different portion becomes part of your gain and that is taxable. This type of tax treatment lets you spread your taxable gain across multiple years. The ratio for this changes over time, and a bigger percentage of the income becomes taxable as the portion of the initial investment diminishes.