Difference Between Immediate Annuity & Deferred Annuity in Insurance

Retirement is a milestone that everyone wishes to experience with relaxation and happiness after years of toiling. You might wish to pursue that long thought of hobby, start a home bakery, travel the world, or just spend time relaxing with your loved ones.

However, you cannot enjoy these second innings of your life without proper planning for stable income that is aligned with your financial objectives.

When we talk about retirement planning, annuities stand out as versatile instruments, offering a great option to secure a steady source of retirement income. 

Let's discuss the detailed aspects of annuities, their types, the striking features of each type, and which one might be the best fit for you. 

An annuity is a financial product designed to provide a reliable income stream, thus serving as an essential product in retirement planning.

It is like a contract between an investor and the insurance company, where the investor makes payments, either as a lump sum or through regular instalments. The insurer, in turn, guarantees regular payouts, often beginning immediately or at a predetermined future date.

The annuity insurance plans, thus, provide you with life coverage and an annuity-based retirement solution for a steady income. Immediate and deferred annuities are the two approaches in annuity income payments that cater to different needs and timelines.

Let's discuss the detailed aspects of these two types, the differences and how they can help you better plan your retirement. 

Immediate Annuity in Insurance

An immediate annuity is where annuity payments begin shortly after your premiums have been paid, usually immediately or within 12 months after the premium payment tenure.

Thus, it provides for a prompt and predetermined stream of income. You can make your payments as a lump sum or regular premiums.

Due to its prompt timing of returns, it is typically chosen by those seeking immediate financial security, like the ones nearing retirement to get a steady and guaranteed source of funds.

Deferred Annuity in Insurance

In contrast to immediate annuities, payouts from a deferred annuity begin at a later, predetermined date. This waiting period is known as the deferral period, and the age at which the investor starts receiving their annuity is known as vesting age.

During the deferral period, the invested funds have the potential to grow through interest or investment returns,

Deferred annuity offers a strategic approach for long-term financial planning. Given the ample time that they have in hand, this option can be a valuable tool for young investors to build financial stability for their future. 

You can claim benefits under section 80C on the premiums paid towards annuity insurance plans.

However, annuity is treated as an income and is taxable as per the income slab.   

The aforesaid tax implications are subject to change in tax laws. We therefore urge you to carefully analyse in consultation with your advisor the tax benefits/tax implications, if any that may arise. 

The choice between immediate and deferred annuity depends on individual financial goals, affordability and circumstances, with age being one of the biggest factors. Let's see how you can evaluate your choice between the two annuities:  

• While deferred annuity is a more affordable option, it requires a waiting period and might not be suitable for investors nearing retirement. Immediate annuities are more suitable for these people seeking immediate, guaranteed income, who are often retirees.
• In contrast, deferred annuities offer flexibility and potential for growth, making them appealing for long-term planning if you are a young investor and have time in hand for the deferment period.  

Thus, the better option depends on factors like timing, risk tolerance and financial objectives, and should be decided based on all these factors.

Retirement planning is essential, but at the same time, it’s also imperative to choose the right investment product that is aligned with your current financial stage and future financial goals. Both immediate and deferred annuity plans have their unique advantages.  

The optimal selection depends on various factors. A thoughtful assessment of these factors is crucial in determining whether immediate payments or future-oriented planning better aligns with one's financial aspirations.