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What Is a Deferred Annuity?
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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To understand the deferred annuity definition, one must know that it is a contract between the investor and an issuer who promises to pay a regular income or a lump sum to the owner at a future date. Many investors use this option to supplement their retirement income during their golden years.
Specifically meant for long-term savings, a deferred annuity does not start paying immediately, unlike an immediate annuity. Investors can delay the payments, and the earnings during this period are tax-deferred. Investors may increase the value by adding money to the account. The best thing is that the investor can withdraw a lump sum whenever needed. Moreover, transferring the annuity plan to another financial institution is also possible.
How Deferred Annuities Work?
Deferred annuities are contracts offering income for a duration in exchange for advance payments. The annuity plan pays out, usually monthly, according to the contract terms, often until the beneficiary’s death. Some annuity plans may also include payouts to the customer’s beneficiaries.
Safety and predictability are the most attractive aspects of this facility. The issuer often offers a specific return on the account or promises a minimum payout. The duration for which the investor invests in the annuity is called the accumulation or savings phase. The time the investor receives income is called the payout or income phase. Many annuity plans provide income for the owner's life and sometimes to their spouse after death.
Types of Deferred Annuities
Deferred annuities differ in terms of their structure. The three major types include the following:
Benefits of Deferred Annuity
Now that what is a deferred annuity is clear, it’s important to understand the advantages it offers to the retiree. These include the following:
Conclusion
A deferred annuity is a lucrative investment option for those seeking a reliable and safe income post-retirement. Apart from the flexibility in choosing how and when to receive the income, these plans offer guaranteed returns with minimal risk. These plans are perfect for people with some years left for retirement and do not require money immediately. However, those seeking immediate income should opt for an immediate annuity plan. Therefore, carefully considering retirement goals and needs is crucial before deciding on the right annuity plan.
Frequently Asked Questions
What is the difference between a deferred annuity and an immediate annuity?
The major difference between deferred and immediate annuities is the timing of payouts. In an immediate annuity plan, income starts immediately after investment. However, payouts start when the deferment period ends in a deferred annuity scheme.
How are earnings taxed in a deferred annuity?
A deferred annuity offers tax benefits under Section 80C of The Income Tax Act 1961, and the premium payments are tax-deductible under Section 80C.
Can you withdraw money from a deferred annuity?
Withdrawing money from deferred annuities is allowed, but the investor must pay a tax penalty and surrender charges.
What happens to a deferred annuity upon the death of the annuitant?
If the investor dies before the beginning of the annuity, the beneficiary receives a lump sum. If the annuitant dies afterwards, the beneficiary continues receiving the payments. If no beneficiary exists, the remaining fund is surrendered to the financial institution.
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