What Is a Deferred Annuity?
A deferred annuity is a contract between a life insurance company and an annuitant that gives the annuitant a future income stream or lump sum payment. These annuities work differently from immediate annuities, which begin payments almost immediately, because all payments are deferred into the future. There are three major types of deferred annuities: fixed, variable, and indexed. Deferred annuities offer serious tax advantages because they can grow tax deferred, providing a boost to retirement savings.[1]
Takeaways
- Insurance companies offer deferred annuities to individuals and couples.
- Deferred annuities are insurance contracts to pay you income in the future.
- •The three types of deferred annuities are fixed, variable, and indexed.
- •Deferred annuities grow tax-deferred, which can improve your savings.
- Investors often choose deferred annuities to lock in retirement savings, income growth, and a guaranteed future payment.
Deferred Annuities: A Beginner’s Guide
Deferred annuities can be purchased inside tax-qualified retirement plans, like 403(b)s or IRAs, or on their own as individual investments. An investor chooses to invest in a deferred annuity to give themselves and their spouse a guaranteed income after retirement. Here’s how it works.
The accumulation phase of the annuity is the time when you contribute to your annuity contract. You contribute to your annuity until you begin taking income payments or withdrawals, which is called the payout or income phase. If you have a deferred annuity inside a tax-qualified retirement plan – like an IRA, 401(k), or 403(b) plan – you will have to take required minimum distributions (RMDs).
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3 Types of Deferred Annuity Plans
Deferred annuities come in three different flavors: fixed, variable, and indexed. Here’s how they each work:
1. Fixed Deferred Annuities
A fixed deferred annuity is a contract that specifies a guaranteed rate of return on your money invested and the payout. Depending on the contract, these fixed rates can be for a specified period.
2. Variable Deferred Annuities
A variable deferred annuity has a rate of return that is based on a basket of underlying securities. For example, the rate can be based on the performance of mutual funds, index funds, or other exchange-traded funds.
3. Indexed Deferred Annuities
Indexed deferred annuities offer a rate of return that is tethered to a specified index, like the S&P 500 or the Dow Jones Industrial Average (DJIA).
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Pros of a Deferred Annuity
- Retirement Savings – Deferred annuities allow your money to grow tax-deferred over time, which can help you build a large retirement savings. By delaying taxes until withdrawals, more of your money stays invested, allowing compounding to work on a larger balance.
- Guaranteed Income – Many deferred annuities offer guaranteed payouts in retirement, giving you a predictable income stream alongside Social Security or other investments. This can reduce financial anxiety because you know you will have a consistent income, even when markets fluctuate.
- Flexibility of Options – With fixed, variable, and indexed deferred annuities, investors can choose a product that matches their risk tolerance and financial goals. There is a buffet of options, and you can customize your annuity to prioritize stability, growth potential, or a combination of both.
- Death Benefit Protection – Most deferred annuities include a death benefit, which ensures that your beneficiaries receive at least the amount you contributed, minus any withdrawals. However, exact terms vary by product. This can make annuities a useful estate planning tool.
Cons of a Deferred Annuity
- Surrender Fees – Deferred annuities usually come with high surrender fees, or fees for withdrawing your money early or cancelling the annuity. These high fees act as an incentive for you to maintain your funds with the insurance company and keep your funds growing.
- Early Withdrawal Tax – The IRS imposes a 10% tax on early distributions from an annuity contract. The additional tax is equal to 10% of the portion included in your gross income.[2]
- Age-Based Withdrawals – Retirement savings that take advantage of deferred annuities often have age-based withdrawal limitations. For example, no withdrawals can be made before turning 59 and a half years old, unless you want to incur an 10% IRS penalty. Because of that, you need to ensure you have proper savings, like a slush fund, and buffer yourself against any cash needs.
Smart Summary
Deferred annuities are contracts between an insurance company and an annuitant that guarantee future income or payments. Deferred annuities are considered a long-term investment. They are used by investors planning for retirement to supplement other fixed-income streams like pension, Social Security, or CD ladders. Planning for retirement? Check out How to Retire 10 Years Early.
Frequently Asked Questions
A deferred annuity is an insurance contract that grows your money tax-deferred now and pays you income later, usually during retirement.
Minimum investment amounts vary by insurer and product, but many deferred annuities allow you to start with a few thousand dollars.
The three main types are:
- Fixed – guaranteed interest rate
- Variable – linked to investment performance
- Indexed – tied to a market index like the S&P 500
Yes, but withdrawals before age 59½ usually trigger a 10% IRS penalty and may have additional surrender charges from the insurance company.
Deferred annuities are low-risk investments for principal protection, especially fixed ones, but payout guarantees depend on the insurance company’s financial strength.
Earnings grow tax-deferred, so you don’t pay income taxes on gains until you withdraw them, allowing your savings to compound faster over time.
They are perfect for people seeking long-term retirement savings, guaranteed income, and tax-deferred growth, particularly to supplement Social Security or pension income.
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(1) Finra.Investment Products: Annuities. Last Accessed March 14, 2026.
(2) Internal Revenue Service. Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs. Last Accessed March 14, 2026.
