Who Would Most Likely Benefit From a Deferred Fixed Annuity?

Retirees often invest in fixed deferred annuities.

Retirees often invest in fixed deferred annuities.

If stock market fluctuations give you the jitters you might give some serious consideration to investing your savings in a low-risk investment like a fixed annuity. Deferred fixed annuities are insurance products that provide you with potential tax savings and an eventual income stream. These annuities typically appeal to people who can afford to invest for long periods and conservative investors who are wary of the stock market. If you have ample liquid savings to cover probable near-term expenses such as home repairs, vacations and new cars then you might consider investing some of your money in an annuity. However, if funds are tight, then annuities might not be your best bet.


You can buy a deferred fixed annuity either with a single premium or a series of periodic payments. You receive a fixed rate of return on your investment during the accumulation phase which normally lasts for between five and 10 years. You can access the money as a lump sum or convert it into an income stream at the end of this phase. While many annuities have a standard money-back guarantee that you can activate at any time, you typically stand to lose some or all of your earnings if you withdraw funds during the accumulation phase. Some companies assess principal penalties in which case you may get back less than you originally invested. Therefore, do not consider buying a deferred annuity with funds that you might need to access within the next few years.


While deferred annuities offer predictable returns, you can potentially earn more if you invest in stocks, bonds or other types of securities. However, you also expose yourself to principal risk with these products so many conservative investors prefer to deposit their funds in annuities. Ultra-conservative investors are sometimes wary of annuities because these contracts are not federally insured. However, insurance guarantee funds exist in all 50 states and these entities in states such as Florida insure your annuity contracts for up to $300,000, per contract holder. Therefore, deferred annuities are well suited to people who are willing to expose themselves to a small amount of investment risk in the pursuit of growth.


The Internal Revenue Service allows deferred annuities to grow on a tax deferred basis. This mean you only have to pay income tax on your earnings when you make a withdrawal from the contract. You can reduce your current income tax level by transferring some of your taxable investments into annuity contracts. You can also roll retirement account money into these products including funds held in 401(k)s and other accounts held by your former employers.


Despite the many benefits, fixed deferred annuities are not well suited to people of all ages. If you have an emergency and need money to repair your home, cover medical bills or other types of expenses then you might find yourself having to liquidate your annuity. Under federal tax laws, you must pay a 10 percent tax penalty on your earnings if you withdraw from an annuity prior to reaching age 59 1/2, as of publication. You have to pay this penalty in addition to ordinary state and federal income tax. Premature contract withdrawal penalties can further reduce your earnings and some young investors lose far more than they gain when they buy and then liquidate fixed annuity contracts.


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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