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What is a Deferred Annuity?

A person can set up automatic payroll deductions in order to contribute to her or his annuity plan.
A single-premium deferred annuity is usually purchased as a retirement savings instrument.
A deferred annuity plan allows for a flexible means of saving for retirement.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 August 2014
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A deferred annuity is a type of annuity contract that allows for periodic contributions to the plan, but does not allow any withdrawals from the plan until either an appointed time is reached or a specific event takes place. For example, a deferred annuity plan may be put is place early in life and receive payments on a regular basis until the point of retirement. At that point, contributions cease and the holder of the annuity account begins to receive regular income payments that are funded from the balance in the plan.

There are two main advantages to a deferred annuity arrangement. First, contributions to a deferred annuity plan are not subject to taxes. The payment of any applicable taxes is postponed or deferred until the annuities are actually received as an income payment at a later date. Depending on the amount of contributions made to the deferred annuity during the calendar year, the tax advantage may be significant.

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The second major benefit to a deferred annuity plan is that is allows for a flexible means of saving for retirement. It is possible to contribute to the plan on an irregular basis, although many people elect to set up payroll deductions as a way of contributing to the annuity plan on an ongoing basis. A deferred annuity arrangement also does not carry any type of sales charges, which is helpful in growing the balance. Most deferred annuity plans will guarantee that the holder of the account will eventually recoup at least 100% of the contributions, even if the underlying investments in the annuity fail to perform up to expectations.

Even after retirement or any other designated key event takes place, it is not mandatory that the recipient begin receiving payments from the deferred annuity program immediately. The recipient still has the option of postponing a payment for additional periods of time, if he or she deems it wise to do so. For example, if the reception of a payment would be likely to move the individual into a higher tax bracket, the payment can be deferred until the next tax period where the chance that the payment would be subject to higher taxes is less likely. It is important to note that in many countries this type of activity is in compliance with current tax laws. However, this is not the case in all nations. For this reason, it is important to understand current applicable tax laws and receive payments from a deferred annuity program in a manner that is within the scope of current law.

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