How Does a Deferred Annuity Work?
A deferred annuity is a financial product designed to provide income during retirement. It comprises two main phases: the accumulation phase and the distribution phase.
1. Accumulation Phase
During the accumulation phase, you make contributions to the annuity over time. These contributions can be made as a lump sum or through regular payments. Your investment grows tax-deferred, meaning you won't pay taxes on earnings until you withdraw the funds. The growth can be linked to a fixed interest rate, variable investment options, or a combination of both.
2. Distribution Phase
Once you reach a certain age or a specific period, the annuity enters the distribution phase. At this point, you can choose to receive periodic payments or a lump-sum amount. The payment options can vary, including fixed payments, variable payments depending on the investment performance, or lifetime income guarantees.
Key Benefits
- Tax-deferred growth
- Flexibility in contribution amounts
- Guaranteed income options in retirement
Deferred annuities are appealing for individuals seeking a stable income stream in retirement while benefiting from tax-deferred growth on their investments.