Deferred Annuity 

A deferred annuity is a powerful financial tool designed to help individuals save for retirement by offering tax-deferred growth and future income. Unlike immediate annuities, it allows investors to contribute funds during their working years and receive payments later, typically during retirement. This makes it especially useful for long-term financial planning. Deferred annuities come in various types- fixed, variable, and indexed, each offering different risk and return profiles. With the ability to customize contributions, payout schedules, and investment strategies, a deferred annuity provides flexibility, security, and potential growth, making it an ideal choice for those looking to secure their financial future. 

What is a Deferred Annuity? 

A deferred annuity is a type of long-term investment contract that allows individuals to grow their money tax-deferred and receive income at a later date, typically during retirement. Insurance companies offer it and serve two primary purposes: saving for retirement and ensuring future income. 

Unlike immediate annuities, which begin payments shortly after purchase, deferred annuities have a waiting period known as the “accumulation phase.” During this phase, the investor makes contributions, and the money grows over time before payouts commence. 

Deferred annuities are popular among individuals who want to build retirement savings while having the flexibility to decide when they begin receiving income. 

Understanding Deferred Annuity 

A deferred annuity functions as a long-term retirement strategy. During the accumulation phase, investors can make either a lump sum contribution or regular payments. The funds grow tax-deferred, meaning no taxes are paid on the earnings until withdrawals begin. 

Once the investor reaches the payout phase, the accumulated funds can be received as a lump sum or as a steady stream of payments, either for a specific number of years or for life. This makes deferred annuities a valuable tool for managing longevity risk—the risk of outliving one’s savings. 

Benefits include: 

• Tax-deferred growth, which allows more efficient compounding. 

• Guaranteed income during retirement (depending on the annuity type). 

• Flexibility in choosing when to start receiving payouts. 

Types of Deferred Annuity 

Deferred annuities come in several types, each designed to meet different investment preferences and risk tolerance levels. 

1. Fixed Deferred Annuity

This type provides a guaranteed interest rate over a set period. It is ideal for conservative investors who prefer predictable growth and protection from market fluctuations. The insurer commits to paying a fixed return, regardless of market performance. 

2. Variable Deferred Annuity

In a variable annuity, returns depend on the performance of investment options such as mutual funds or equity portfolios. The investor assumes the investment risk so that returns can fluctuate. This offers higher growth potential but also higher risk, making it suitable for those comfortable with market exposure. 

3. Indexed Deferred Annuity

This option links returns to a stock market index, such as the S&P 500. While gains are typically capped, many indexed annuities offer downside protection, meaning your principal is safeguarded even if the index performs poorly. It provides a middle ground between fixed and variable annuities. 

Working of Deferred Annuity 

The operation of a deferred annuity includes two phases: 

Accumulation Phase 

• Begins once the annuity is purchased. 

• The investor makes contributions, either as a single lump sum or periodic payments. 

• Funds grow on a tax-deferred basis. 

• No withdrawals are made during this phase (unless early withdrawal penalties are accepted). 

Payout Phase 

• Begins at a future date chosen by the investor. 

• Payments are made periodically (monthly, quarterly, or annually) or as a lump sum. 

• Income can be structured to last for life or a fixed number of years. 

• Earnings are taxed as ordinary income when withdrawn. 

This structure makes deferred annuities highly customisable to retirement needs. 

Examples of Deferred Annuity 

Example from the US Market 

A 40-year-old investor in the US purchases a fixed deferred annuity with a one-time contribution of US$ 100,000. The insurance company guarantees a 4% annual return. The investor plans to retire at 65, allowing 25 years for the funds to grow. Over that period, the investment grows tax-deferred to approximately US$266,584. At retirement, the funds are converted into monthly income for life, offering predictable retirement income. 

Example from the Singapore Market 

A Singapore-based investor uses the poems.com.sg platform to invest in an indexed deferred annuity linked to the SGX Index. The individual contributes SGX 12,000 annually for 20 years. The annuity guarantees a 2% minimum annual return but allows for additional gains based on index performance. At age 60, the investor opts for a 15-year payout plan, receiving quarterly income that complements CPF Life payouts and other savings. 

Frequently Asked Questions