A deferred annuity is an investment account used to save money over and extended time period and is most often used as a means to save for retirement. You can set up a deferred annuity in one of two ways. The first way is to make one single premium payment into the account (common with immediate annuities) and the other is to make flexible payments into the account over a period of time (more common with variable annuities).
Money in your deferred annuity account grows tax free until you withdraw it. This simply means that you do not have to pay taxes on your earnings until you take money out. This allows your money to grow faster than an account that taxes income up front.
Deferred annuities are typically considered a better investment with a higher return than more traditional means of saving money like a savings account or certificate of deposit (CD), for example. Pay outs are made on an annuity over an extended period of time. When you are ready to start collecting payments from your deferred annuity you can set up a payment schedule. Most people choose to receive monthly payments but you can also choose to receive payments from the account quarterly, yearly or bi-annually.
Deferred annuities very often come with a death benefit. This means that after the death of the person who owns the deferred annuity, money would be paid out to the person’s heir. The money paid would typically include any remaining principal and investment income that has accrued.
At any time the holder of the deferred annuity can, if they choose, convert the account into an immediate annuity. This would allow them to start receiving payments from the account. Depending on the specific terms of the account, payments are given for a set amount of time or for the remainder of the account holder’s life.