What Is a Deferred Annuity?
A deferred annuity is a contract with an insurance company that promises to pay the owner a regular income, or a lump sum, at some future date. Investors often use deferred annuities to supplement their other retirement income, such as Social Security. Deferred annuities differ from immediate annuities, which begin making payments right away.

Deferred annuities come in several different types—fixed, indexed, and variable—which determine how their rate of return is computed.
Withdrawals from a deferred annuity may be subject to surrender charges as well as to a 10% tax penalty if the owner is under age 59½.

There are three basic types of deferred annuities: fixed, indexed, and variable. As their name implies, fixed annuities promise a specific, guaranteed rate of return on the money in the account. Indexed annuities provide a return that is based on the performance of a particular market index, such as the S&P 500. The return on variable annuities is based on the performance of a portfolio of mutual funds, or sub-accounts, chosen by the annuity owner.

All three types of deferred annuities grow on a tax-deferred basis. Their owners pay taxes only when they make withdrawals, take a lump sum, or begin receiving income from the account. At that point, the money they receive is taxed at the same rate as their ordinary income.

The period when the investor is paying into the annuity is known as the accumulation phase (or savings phase). Once the investor elects to start receiving income, the payout phase (or income phase) begins. Many deferred annuities are structured to provide income for the rest of the owner’s life and sometimes for their spouse’s life, as well.