What are the Benefits of Deferred Annuity

If you are looking for steady income through your retirement days, annuity schemes can be the best way to manage taxes on that income. In addition, with deferred annuity, when you deposit capital with an insurance company, the taxes on the returns are deferred till you withdraw them. However, if you withdraw them before the maturity date, you might have to pay 10% as penalty, along with other income taxes.

Deferred annuity plans are the best for those who want pension to begin immediately after retirement. Annuity plans are the safest because they are long-term investments that enable the policy holder to save on a regular basis for 30–40 years before retirement and use the amount for another 30 to 40 years.

Advantages of Deferred Annuity Plans
Immediate annuity plans work best when you want to start receiving the income immediately. But, with deferred plans, you have multiple options available, such as:

v There is an “accumulation phase” for such plans, which is basically the time when you start withdrawing the income from the annuity plan. You can add a lump sum amount of money to the account to increase the value of the annuity or simply leave it alone. However, you need to understand that there are limits to the annual contribution and specific requirements for the contributors.

v In case of fixed deferred annuity, you will earn interest at a rate that is either fixed by the insurance company or mentioned in the annuity contract. You are not paid anything less than this fixed interest rate. Also, you do not have to claim the interest income on your tax returns annually. It gets delayed till you make a withdrawal from the annuity. Fixed annuities work best for all those who do not require a regular income till the age of 59.5 years or later.

v Deferred schemes grow without taxes until you withdraw the income. However, it will be taxed as ordinary income when you do withdraw. One advantage of this is that the tax rate depends on the income you are earning at the time of withdrawal. Mostly, the income of the investor declines by the time they claim the returns from the annuity. This makes the tax rate lower than for those who claim while they are still earning.

v One of the most crucial advantages of deferred plans is that they allow investors to use the value that has grown during the accumulation period. The size of the income depends on the value of the annuity and the rate of benefits when the income starts flowing.

v Another great benefit of these plans is that they provides death benefits to your beneficiary, in case of the policy holder’s demise before the payment begins. Whichever is more — contract value or the premium, is given as benefit.

Make sure you use an annuity calculator to check how much income you will receive from a deferred annuity plan to make an informed investment decisions.