How does a deferred annuity work?

With many stories in the news about how many people are now having to work past the normal retirement age to be able to afford to live, there has never been a better time to ensure that you have enough savings put by for that approaching rainy day. One such way to do this is with a deferred annuity.

Definition
At its most simple, this is a long-term account that you put savings into towards your retirement. You can either make regular contributions, or a single lump sum, which you can then add to later, should you have some free extra income. Since what you save in a deferred annuity is known as 'tax deferred', you won't pay any penalties on your savings, or earnings, until you actually retire.

Accumulation Phase
Generally, there are two phases to a deferred annuity. The first is known as the accumulation phase, or the savings and investment phase, and is the period of time that you actually input any funds into the scheme. Depending on whether you have a fixed interest rate or a varied one, this period will determine how much savings you have on your retirement.

Distribution Phase
The second part of a deferred annuity is when you actually use the savings, and this is known as the distribution phase, or retirement income phase. Depending on your preferences, and whether you have other sources of income available to you, you can set up a regular payment system, make withdrawals as and when you need money, or even set up a payment scheme where you will receive money for the rest of your life. This type of feature is one of the key benefits in annuities.

Guarantees
Another positive feature of a deferred annuity is that, should you die before the plan is completed to fruition, any beneficiaries that you have will automatically receive everything you have paid into the scheme, with the exception of any withdrawals you may have made. Not only does this give you peace of mind, but your loved ones as well.

Fixed Deferred Annuities
As well as there being two different phases to an annuity, there are also two different types. The first is a fixed option. This is where whatever you invest, you will be guaranteed a fixed rate of interest, and know how much you are going to get paid back to you. The downside of this is that should interest rate returns increase past your fixed one, you will not benefit from any extra earnings you may have received otherwise.

Variable Deferred Annuities
The other type of annuity available is the variable one. This allows a far greater scope of what investments you can make, and with what companies. With this option, you can make any amendments needed, depending on the state of the market where your money is invested. Once again, the downfall to this is that your potential returns are not guaranteed.