The term “immediate” and “deferred” comes from the moment where you will start receiving the annuity payment. You can technically buy any types of annuities and make it an immediate or deferred contract. Let’s take a look at their main characteristics.
The immediate annuity is also called an income or single premium immediate annuity. The purpose of this transaction is to receive distribution within the same year the contract is purchased. Please note that the purchase of an immediate annuity is irrevocable. This means that one you have agreed to the contract, there are no way back.
There are two types of immediate annuities: Fixed and Variable.
The fixed annuity provides a steady stream of income to the investor. The amount of the distribution is guaranteed. Read more about fixed annuity.
The distribution from this contract varies according to the value of its sub-accounts. The investor has the ability to manage his investment within the annuity. Read more about variable annuity.
The definition of the deferred annuity is easy to remember as the money is invested in a tax deferred account. The investor accumulates money in a tax deferred investments until he starts the withdrawing process. As long as the money is in the account, there are no taxes charged. They apply only on distributions. This could be a great complimentary product to your savings if you have already maxed out your regular pension contributions.
Investors have the option between a fixed, variable or indexed annuity contract. Deferred annuities are by far more popular than immediate annuities as Americans are holding more than $1 trillion in them. Their tax advantage makes them highly attractive for any investors who is looking to build a pension and saves on taxes at the same time.
On the other side, immediate annuities might gain in popularity in the upcoming years as boomers are looking for more diversified ways to generate retirement income. Therefore, they are more likely to use a part of their investment and convert it into an annuity.