Deferred Annuities
by Ellise Walsh

Workers today face a staggering array of choices when it comes to planning for their own retirement. While their parents may have worked for one company for 30 years and retired with a guaranteed pension, they must plan for their own retirement. There are a number of choices for retirement planning, including 401(k) plans, 403(b) plans, IRA accounts and deferred annuities.

A deferred annuity is an annuity which is used as a personal retirement account. A deferred annuity allows the saver to build their asset base on a tax deferred basis for their long terms goals, such as retirement. There are two stages involved in a deferred annuity program. These stages are the investment and savings phase, when the assets in the annuity are invested for long term potential growth, and the retirement income phase. The retirement income phase is the time when the owner of the annuity begins drawing on the money that has accumulated over the years to provide them with a monthly income for their retirement years.

There are two types of deferred annuities, fixed deferred annuities and variable deferred annuities. Fixed deferred annuities generally feature both lower risk and a lower overall growth potential. These types of deferred annuities typically invest in fixed rate securities such as bank certificates of deposit and government bonds. Fixed deferred annuities pay a fixed, guaranteed rate of interest. The rate of interest is guaranteed by the issuing company for a set period of time. At the end of that time period, the issuer will set a new, guaranteed rate for the next set period of time. The interest rate achieved and the length of the contract term, will vary depending on the annuity contract, but most annuity contracts have a minimum interest rate.

With variable deferred annuities, investors trade the potential for greater reward for an increased level of risk. Variable deferred annuities are able to offer choice and flexibility when it comes to investment vehicles. In addition, variable deferred annuities are professional managed through a variety of investment portfolios. The portfolios held in variable deferred annuities will typically include stocks and bonds. These investments can range from very conservative to very high risk high reward types of investments. Therefore, the value of a variable deferred annuity will fluctuate in response to the value of the underlying investments it contains.

Variable deferred annuities are designed to be long term investment vehicles. They are designed to allow your assets to grow on a tax deferred basis and then provide a steady stream of retirement income after the assets it contains has grown to a significant nest egg.

The biggest advantage of a tax deferred annuity is that your assets grow tax free. No taxes are due until you begin to draw the money out at retirement. Most retirees will be in a lower tax bracket when they retire, so the taxes they pay in retirement will be lower than the taxes they would have paid while they were working.

In addition, variable deferred annuities offer a wide choice of investment portfolios. You benefit from having a professional investment advisor manage the stocks and bonds contained in the variable deferred annuity. This can offer the potential for higher growth than the fixed rate deferred annuity can offer.

It is also possible to move funds between investment choices during the life of the deferred annuity. No taxes are due when the funds are moved. Taxes are only due when the money is actually removed from the deferred annuity.

The beauty of a deferred annuity is that it offers guaranteed income for life. Unlike other investments, you can rest assured that you will not outlive your money. This peace of mind alone can make a deferred annuity program very attractive to many people.

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