Deferred Annuity Vs. Savings Account

Some annuities expose your savings to stock market fluctuations.

Some annuities expose your savings to stock market fluctuations.

You work hard for your money and you want to see your nest egg grow, but choosing the right savings vessel can prove tricky with so many products on the market. Savings accounts and deferred annuities are both designed to grow your money over the course of time. However, these two product types work very differently, provide you with certain benefits and expose you to certain risks.


Many financial planners suggest that you should keep three to six months living expenses in liquid accounts so that you have money to cover emergencies, such as your car breaking down or your pipes bursting. Savings accounts are designed to hold money for the short term; these accounts often have low minimum balance requirements that enable you to gradually accumulate money. Deferred annuities on the other hand are designed to provide you with tax-efficient earnings in your retirement years. These products often have term times of a decade or more and you usually have to buy annuities with a single lump sum payment, rather than a series of small deposits.


The federal government put safeguards in place after panicked investors pulled their cash from banks during the Great Depression. These rules include regulation D, which limits withdrawals made from savings accounts with checks, debit cards or Internet banking portals, to just six per month. In-branch cash withdrawals and automated-teller-machine withdrawals are uncapped. Some deferred annuities have clauses allowing you to make small annual withdrawals, but in most cases, your funds are locked up for a certain number of years. Withdraw your money early and you get hit with hefty surrender penalties that can top 8 percent of the account balance.

Return Versus Risk

Since savings accounts are highly liquid, banks have little incentive to pay you vast sums of money for keeping your funds in these accounts. Over the long term, your savings account interest will rarely keep up with inflation. This means you will lose spending power over the course of time. Deferred annuities sometimes pay fixed interest rates which normally exceed rates on savings but dot not always stay ahead of inflation. Variable and indexed annuities have returns that are based on the stock market or mutual funds in which case your returns are potentially unlimited although some contracts cap your maximum gains. You also run into the risk that you could lose money if the market takes a nosedive.


Regular savings accounts are fully taxable, which means you may have to pay income tax if you earn a decent amount of interest on your account. Annuities grow on a tax-deferred basis, which means you only pay taxes when you withdraw your money. However, if you find yourself in a crunch and need cash for home repairs or another emergency, then you may have to cash in your annuity sooner than expected. If you do so before you reach the age of 59 1/2, then you must pay a 10 percent tax penalty as well as any applicable surrender fees and income tax.


If a deferred annuity contract loses money, you may get a return of premium because these contracts include insurance clauses that guarantee you money back. However, you pay fees for this insurance that are deducted from your returns. Additionally, if the annuity firm goes bankrupt, you may lose your nest egg although some annuities are insured by state-sponsored guarantee funds. Savings accounts do not have principal fluctuations. Banks have been known to go bankrupt, but the Federal Deposit Insurance Corporation insures bank accounts up to $250,000 per account owner per bank.



About the Author

Ciaran John began writing in 1994 with contributions to "The Hourly Press" and "The Sawbridgeworth Observer," and has since written for many online and print publications. He has 12 years experience working for financial services companies as a business banker, lender and investment representative and spent four years working in human resources.

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