Delayed Annuity

A delayed annuity is an annuity in which the first payment is not paid immediately, as in an immediate annuity. A delayed annuity, more commonly known as a deferred annuity, is a type of life annuity that guarantees a reliable stream of cash payments to an annuitant until death, at which point the benefit may be transferred to a beneficiary or estate depending on the options chosen by the buyer. The way a delayed annuity differs from most other annuities is in how premiums are paid into it and how and when withdrawals are made. Delayed annuities may be funded over time via monthly contributions or a lump-sum payment. Either way, withdrawals do not occur directly after funding, as with an immediate annuity. In some cases, a delayed annuity may be used as a method of parking money for future use with the benefit of an annuity's tax treatment.

A delayed annuity grows during the accumulation phase (also known as the deferral phase) and pays out benefits in the distribution phase. Some delayed/deferred annuities allow for a single premium payment that will then grow during the accumulation phase (a single-premium deferred annuity). In a flexible-premium deferred annuity, an annuity buyer may make additional payments during the accumulation phase after making an initial premium payment. 

A delayed annuity buyer need not ever turn the money in the annuity into a series of income payments. Money may be withdrawn as needed, in a lump-sum payment, or transferred to another account or annuity. When a delayed annuity is used this way, the annuity buyer retains control of the money, rather than being locked into payments by initiating a withdrawal in a distribution or annuitization phase.

If Steve were to fund an annuity with a premium payment and receive five yearly payments of $1,000 at the end of each year starting this year, then this payout would be considered an ordinary annuity. On the other hand, if the five payments are deferred for 10 years, this instrument is classified as a delayed annuity. In order to determine the net present value of the delayed annuity, the payments must be discounted to year zero (the present).

Delayed annuities can come in a variety of types depending on the needs of the buyer.

A fixed delayed annuity (more commonly known as a fixed deferred annuity) is similar in function to a certificate of deposit, except that the tax on interest is deferred until withdrawal. Typically, the annuity writer will specify what guaranteed interest rate the annuity will pay.

A variable delayed annuity (more commonly known as a variable deferred annuity) is similar to buying mutual funds in that returns will depend on the performance of a group of sub-accounts. Such annuities can be both riskier and more expensive.

A longevity annuity works like a normal life annuity but tends to start much later than the typical retirement age. It acts like longevity insurance in that payments may not start until a retiree's other assets are spent down.