Deferred and Immediate Annuities
What is the difference between Deferred Annuities and Immediate Annuities?
Individuals can actually plan, and according to their needs, choose among deferred or immediate annuities.
In a deferred annuity, the annuitant will receive payments starting at retirement. An annuitant can invest either a lump sum all at once or make payments over a specified length of time. Also, he or she can invest in either fixed or variable type accounts. This type of annuity is good for long-term retirement planning since these funds grow tax-deferred till the time you start receiving them.
With immediate annuities, the annuity owner starts to receive payments immediately upon investing in the annuity. This is the perfect choice for those who need immediate income from an annuity. Individuals have the options of a fixed payment that does not change or a variable payment that is based on the annuity’s performance.
‘What are the annuity payout options available to me?
‘How I want to be paid’ is an important question to ask while investing in an annuity. Annuitants can select annuity payouts for a set period of time or continue for their lifetime. With some options, a beneficiary can be designated to receive payments upon annuitant’s death. There are a several choices available including:
With straight life, annuitants get income for their entire lifetime – even after all the money put into the annuity has been used up. However, if the annuitant dies before the money in the account has been used up, his or her dependents will not be able to collect payouts. The straight life annuity might be perfect for those who need to maximize the amount of income received and do not have any dependents.
Joint and Survivor
This type of annuity pays annuitants for their lifetime. After annuitant’s death, it will pay the joint annuitant for the rest of his/her life. This option, however, reduces the monthly payout amount an annuitant gets because the calculation is based on the life expectancy of both the annuitants.
With this option, the annuity is paid out over a defined period of time as per the annuity owner’s choice, such as 10, 15 or 20 years. For example, Jane chooses a 15 years period. If, however, Jane dies in 10 years, her beneficiary will be paid for the remaining five years.
This payout option provides income for life. If an annuitant dies before he or she receives an amount equal to total premium paid, the assigned beneficiary gets the portion not yet collected.
What happens if I withdraw funds early?
Annuity is a long-term retirement plan and there are charges or fees if an annuitant takes money out before a specified period of time. But, there are many fixed annuities allowing annuitants to take a 10% of their money without being charged for it.
Do I have to pay any tax on my annuity earnings?
Earnings from an annuity grow on a tax-deferred basis and annuitants don’t have to pay any taxes on their annuity earnings until they withdraw funds.