Anybody who plans to invest in annuities needs to understand the difference between deferred and immediate annuities. Both kinds of annuities are excellent investments but they are appropriate in different situations.
An immediate annuity is a tool for managing money that a person already has while a deferred annuity is a wealth-building mechanism. Immediate annuities are designed to be purchased with one large payment. They are called immediate annuities because the holder starts receiving payments almost immediately.
A deferred annuity is purchased over a number of years with smaller regular payments. The idea behind this is to build up income in the annuity to create future wealth. In most deferred annuities any interest from investments is reinvested to increase the amount of the annuity.
Advantages to Immediate Annuities
Immediate annuities are usually designed to provide an immediate long term stream of income. A person might purchase one on retirement in order to provide a source of income without the hassle of managing investments.
An individual who fears that he or she might become incapacitated could purchase one in order to provide a stream of income. Individuals might purchase immediate annuities to provide future income for family members.
An immediate annuity would be a good investment for a person who has a large amount of money they don’t want to risk. Annuities are generally a much safer investment than the stock market or mutual funds. A big advantage to an immediate annuity is that a person does not have to spend a lot of time and effort managing it.
Many people will purchase immediate annuities shortly before retirement to ensure retirement income. An immediate annuity is an excellent means of managing a large amount of money. For example an immediate annuity would be an excellent investment for a person who comes into a large amount of money right before their retirement.
Advantages to Deferred Annuities
The big drawback to immediate annuities for most purchasers is their cost. To receive a substantial amount of income from an immediate annuity a person will have to invest a large amount of money. The average investor simply won’t have that much money available.
Deferred annuities can be an excellent means of building retirement income because they accumulate over time. A person who is saving for retirement can put a percentage of their income into a deferred annuity.
Deferred annuities will generally be more secure than stocks and other traditional investments. Unlike stocks annuities under $100,000 are generally insured by states which does reduce risk. They also require less oversight so they are a good investment for those without much financial knowledge or experience.
Another advantage to deferred annuities is that it is a good way to augment traditional sources of retirement income such as pensions and IRAs. In many cases, persons can put additional funds into deferred annuities and get tax benefits.
A big advantage to deferred annuities is that money in them is not taxed. This gives a person a tax free means of building up wealth. Funds in a deferred annuity could be subject to income tax at the normal rate and a 15% early withdrawal penalty if a person under 59 and a half years old takes them out.
There are also some deferred annuities that allow an individual to take funds out without penalties. This eliminates one of the traditional drawbacks to deferred annuities – the penalties accrued for early withdrawal. Persons who are concerned about being able to get funds in an annuity in emergencies should carefully read the annuity agreement before buying it.
Both immediate and deferred annuities are excellent investment vehicles. Anybody planning for retirement or pondering what to do with extra money should look into annuities as an investment. If you decide to go with a fixed deferred annuity, make sure you lock up your fixed annuity rates early, rates tend to rise and fall often.