Introduction to Deferred Annuities
For those who like planning everything in their life, a deferred annuity is definitely the plan for you. An investment in a deferred annuity is specifically done for life after retirement. An individual who has planned and thought far ahead will certainly invest in something that gives him assured returns after retirement. Investing in a deferred annuity is the ideal plan for that. It is simple to determine the earnings on the investment from an annuity calculator and make a decision accordingly on the amount of investment. There are several advantages and benefits of investing, which can simply make your life easy after retirement.
A deferred annuity is an agreement between the annuitant and insurance provider to guarantee the best achievable return on the investment. It is possible to either make regular payment or a one time investment to purchase an annuity. The choice is determined by your financial potency and objectives. The insurance companies guarantee the constant flow of income after a regular interval. The choice of payment deferment of the deferred annuity policies will help allow your investment to enjoy the additional growth throughout the accumulation period.
Types of Deferred Annuities
Fixed Deferred Annuity
A fixed deferred annuity gives a fixed interest rate which is credited to your account within a given period of time. After this period has expired, the account is subject to market conditions, but there can be a minimum rate specified at which the annuitant, holder of the annuity, can bail out of the funds to prevent clinging to an investment which is not performing well.
Variable Deferred Annuity
The variable deferred annuity is a more aggressive kind of annuity which often fluctuates in accordance with market conditions. With this type of account a fixed interest rate is not guaranteed. Because it is such an aggressive account, the possibility to make large sums of money exists.
Index Deferred Annuity
The third type of deferred annuity is the index annuity. This annuity is similar to a specific index such as the S&P during the accumulation stage. This annuity is also secured with a minimum amount below, which the interest cannot decrease. This prevents the capital in your account from being lost if the S&P lose a substantial amount of value.
Certificate of Deposit Deferred Annuity
The final type of deferred annuity is the Certificate of Deposit Deferred Annuity. These annuities are similar to certificates of deposit (CDs) and can vary from one to ten years in a term. They assure a period of time for the initial interest rate, but like the normal Certificate of Deposit there is limited liquidity which implies that you may make withdrawals.
Advantages of Deferred Annuities
Deferred annuities give a significant benefit through tax deferral. Though you need to wait for a certain period of time to receive any funds, you receive the additional benefit of tax relief as your investment increases.
Don’t undermine this enormous benefit with a fixed deferred annuity. Since the rates of taxes are high, it will take a major portion of your savings. For example, if you are eligible for a tax of 35% and the return on annuity is 55, you will be able to realize the complete 5% return as a result of tax deferrals.
On the other hand, if your earnings are taxed instantly, the returns are reduced to 3.25% which is just above the annual US rate of inflation of 3%. Hence, when an individual whose investments are subjected to instant tax retires, his or her investments rarely increase in terms of real money.
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