What Is a Deferred Annuity? Key Guide and Benefits

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If you’ve been wondering what is a deferred annuity, it’s essentially a retirement savings product that lets your money grow tax-deferred until you decide to withdraw it. You can invest either a lump sum or make ongoing contributions, and in return, you’ll receive guaranteed payments later — often when you retire.

The idea is simple: you save now, your money grows without yearly taxes and you enjoy a steady stream of income when you need it most. This makes deferred annuities appealing for people who want financial security in retirement, especially those without pensions.

How a Deferred Annuity Works

A deferred annuity has two main stages: the accumulation phase and the payout phase.

1. Accumulation Phase

• You make contributions, either one-time or over several years.
• Earnings grow tax-deferred, so you don’t pay taxes until you take money out.
• This phase can last months or decades, depending on when you plan to start withdrawals.

According to LIMRA, U.S. annuity sales hit a record $385 billion in 2023, showing more people are using them to prepare for retirement.

2. Payout Phase

When you’re ready to tap your funds, you choose how you want to get paid:

• Lifetime income: Smaller monthly payments that continue for as long as you live.
• Period-certain income: Payments for a set number of years, with any remainder going to your beneficiary if you pass away early.
• Lump sum: All your money at once (note: the full taxable portion is due that year).

Main Types of Deferred Annuities

More and more folks are looking to annuities as an option. Notably, in 2024, the U.S. annuity market exploded to $434.1 billion in sales, marking a 13% increase from the previous year. Here are some of the different types you’ll have to choose between:

Fixed Deferred Annuity

• Guaranteed interest rate from the insurer.
• Low risk but modest returns. Your money won’t lose value, but it may not outpace inflation.
• Best for conservative investors who value stability.

Indexed Deferred Annuity

• Earnings are tied to a market index, like the S&P 500.
• Offers growth potential with principal protection.
• Returns are capped, so you won’t capture full market gains.

Variable Deferred Annuity

• Invested in subaccounts similar to mutual funds.
• Higher growth potential, but your balance can drop with market declines.
• Comes with fees often ranging from 2% to 4% annually, according to the Financial Industry Regulatory Authority (FINRA).

Deferred Income & Longevity Annuities

• Deferred income annuity – Payments start years after purchase (often between ages 65-75).
• Longevity annuity – Payments begin later, typically between ages 80 to 85, offering higher monthly payouts.

Real-World Payout Example

A key factor in folks opting for annuities is financial security. According to a BlackRock survey, 97% of annuity owners say their annuity reduced their fear of running out of money, while 93% reported it eased worries about day-to-day expenses.

So let’s look at an example of what a 65-year-old man with a $100,000 deferred annuity can expect:

Waiting to start payments can boost monthly income by more than 60%, since the payout period is shorter.

Benefits of Deferred Annuities

There are some key benefits and downsides you’ll need to consider before pulling the trigger on an annuity. Here’s a breakdown of both:

1. Tax-Deferred Growth

Your earnings grow without annual taxes, which can help your balance compound faster over time. The IRS notes that tax deferral can significantly increase long-term growth, especially over decades.

2. Guaranteed Lifetime Income

Predictable monthly payments mean you won’t run out of money, even if you live longer than expected.

3. Flexible Payment Options

Choose between lump sum, monthly or custom payment schedules.

4. Death Benefits

Many contracts include a death benefit, ensuring your beneficiary receives funds if you pass before payouts are complete.

Potential Drawbacks

Fees

• Administrative costs, mortality and expense charges, and rider fees can add up.
• Some variable annuities have all-in costs above 3%, which can reduce long-term returns.

Surrender Charges & Early Withdrawal Penalties

• Withdrawing within the first 5 to 10 years may trigger surrender fees of 5% to 10%.
• Withdraw before age 59½, and you’ll face a 10% IRS penalty plus regular income tax.

Liquidity Limits

Deferred annuities are designed for long-term investing, not quick access.

Inflation Risk

Payments may not keep pace with rising living costs unless you add an inflation-protection rider.

Who Buys Deferred Annuities?

• Retirees without pensions who want a guaranteed income.
• Conservative investors who value principal protection.
• Middle-income households — Gallup found 70% of annuity owners have annual incomes under $100,000, with a median of $79,000.

In 2018, about 30% of retirees included a life annuity as part of their retirement income strategy (and 38% of those under 70 used one as their first income source).

Deferred vs. Immediate vs. Secondary Market Annuities

Final Take to GO: Is a Deferred Annuity Right for You?

A deferred annuity can be an effective way to grow money tax-deferred and guarantee income later in life. It’s best suited for people who:

• Have other sources of income before retirement.
• Don’t need immediate access to their funds.
• Value predictable, long-term income.

Before buying, compare annuity types, fees and payout options with a fiduciary advisor to ensure it fits your retirement plan.

Information is accurate as of Aug. 14, 2025.

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