We’ve helped lots of people who have wondered whether deferred annuities retirement schemes were a good investment option for them.
Many people feel nervous about the potential risks associated with deferred annuities whilst others are intrigued about the potential returns they can make on their investments.
To help you make an informed decision about whether or not you should buy deferred annuities, we’ve created this simple guide which answers the most frequently asked questions.
We’ll be covering the following areas:
- What are deferred annuities?
- How do deferred annuities work?
- What are deferred variable annuities?
- What are deferred fixed annuities?
- What are the benefits of purchasing a deferred annuity?
- What are the risks of purchasing a deferred annuity?
- What is the typical interest rate for a deferred annuity?
- How to calculate deferred annuity
- Are there alternative deferred annuity products?
- Deferred annuities FAQ
- Should I buy deferred annuities?
- Should I seek advice?
- Speak to a pensions expert
If you would like to learn more about deferred annuities, make an enquiry and we can arrange for an expert to contact you directly.
Read more general information about pension annuities in our guide.
What is the definition of deferred annuity policy?
A deferred annuity, also known as a deferred income annuity, is a type of annuity that allows the investor to delay their payments and decide when they will receive them.
A contract is set between an individual and usually an insurance company, which typically states that the individual’s funds are invested. In return, the company pays them interest on their money and any profit made from the investment.
A minimum interest rate is guaranteed, which provides some assurance for the investor who will always receive an income, regardless of how the investment performs.
What are the tax implications of deferred annuities?
Because annuities are classified as non-qualified retirement instruments, they receive a tax benefit in the form of tax deferral on earnings. This means that any income made through a deferred annuity is taxed as ordinary income. For many people, this is a huge draw.
How do deferred annuities work?
With a deferred life annuity, you agree to deposit your money into an account, then the company you purchase your deferred annuity from agrees to set either a fixed interest rate or a varying interest rate.
This rate usually remains the same for ten years and then after it expires, the rate is reset and can change from year to year.
Deferred annuity interest rates
The interest rates you are offered can differ depending on many factors including your age, your deposit amount, and the success of the company’s investment strategy.
Usually, annuity contracts have a minimum rate that they guarantee you which ensures that your account never falls below a certain minimum, regardless of the economic climate or other factors at the time.
How to compare deferred annuity rates
Comparing the interest rates for deferred annuity schemes is always recommended, however, finding the best rate can be long and labour-intensive. Luckily for you, the pensions experts we work with have access to the whole market and can find the best rates to suit your needs. Get in touch today for a no-obligation, free chat today.
How do I find the best deferred annuity quotes?
Once again, this is a case of consulting with an independent pensions advisor, like the ones we work with. They can compare all of the available deals on your behalf and find you the best quote, based on your needs and circumstances.
Remember, if you approach a provider directly, you will only have access to their deals and run the risk of missing out on more favourable rates elsewhere.
Make an enquiry here and we’ll connect you to an expert with whole-of-market access.
What are deferred variable annuities?
A deferred variable annuity policy is a type of annuity that delays payments to the investor until they decide to receive them; this could be an option for someone who is willing to risk guaranteed income for the opportunity to earn a little extra.
The income that investors receive through a variable deferred annuity is dependant on the investment’s performance, so it is considered to be a higher risk in comparison to a fixed annuity.
If the investment fails or performs badly, the income that you as the investor receive will go down. However, if the investment performs well, the income and therefore payout would be greater.
Fluctuating funds can make it difficult to predict how much money you could make overall, so if you like the dependency of a predictable income, variable annuities may not be the best option for you. It’s always best to go through your options with an expert.
What are deferred fixed annuities?
Deferred fixed income annuity is a type of product which can allow investors to earn interest with the safety of knowing how much they will earn each month.
Can I postpone my deferred annuity payments?
Because the annuity account is deferred, the account holder can postpone their payments which can help them to avoid heavy income taxes on their earnings.
You can’t lose your money unless the insurance company fails, which is unlikely if it has a strong financial rating. Fixed annuities are usually more common as investors can’t lose their money – that is of course unless the company fails.
A fixed deferred annuity contract should always be covered by the Financial Services Compensation Scheme, so before signing or agreeing to any terms, have a pensions professional look over your contract.
For more advice on fixed deferred annuities, talk to an advisor here.
What are the benefits of purchasing a deferred annuity?
There are a number of reasons why people would choose a deferred annuity over other retirement products, and they include…
Deferred annuity tax benefits
Money made through a deferred annuity is only taxable upon withdrawal. This means that money can build up in the account and avoid taxation and, once the account holder is ready to receive funds, the money is only subject to income tax.
Another tax benefit is that the rate of tax that the account holder pays on their income is set by how much income they earn in that year. For most retirees, their income is low by the time they are ready to withdraw funds and therefore they pay a lower rate of tax.
Deferred annuity contracts are exempt from creditors
Annuity contracts are exempt from most creditors (although not all). This means that any funds within the account cannot be taken away by credit agencies in order to resolve debts.
As well as this, deferred annuity contracts are unconditionally exempt from probate proceedings. This would mean that in the event of the account holder’s death, the courts cannot legally oversee the distribution of funds in the account or order them to be used to pay off debts or other liabilities.
Potential to make more money with a deferred life annuity
The appeal of a deferred annuity for most is the potential to invest their money and make more.
There is also security in knowing that with a deferred annuity, the account holder is always guaranteed a minimum payout.
What are the risks of purchasing a deferred annuity?
Before proceeding with a deferred annuity purchase, you should also consider the potential drawbacks, and they include…
The fees involved
Deferred annuity agreements can have unfavourable terms which stipulate that the account holder pays fees if they break any of them.
It is important to check a deferred annuity contract for any charges that you could have to pay in the future.It may be the case that the fees are so high that you are prevented from withdrawing funds early.
Contact an advisor for more information about the fees and charges associated with deferred annuities.
They can be complicated
Despite the benefits of deferred annuities, they can be confusing. Different companies have varying terms and interest rates, which can make it difficult to calculate and understand which option is more financial viable for you.
For an in-depth comparison of the deferred annuity options that may be available to you, speak to a pensions professional. They can break down each product and explain the pros and cons of each one, to help you make a more informed decision about how to proceed.
What is the typical interest rate for a deferred annuity?
Deferred annuity interest rates can vary heavily between companies, and your own personal circumstances can also affect the rate that you are offered.
As mentioned previously, the rate of interest that you can make on the funds in your deferred annuity account can go up or down, depending on whether you have a fixed or variable rate account.
This, along with other factors such as each company’s investment strategy can affect the amount you make. The lower the interest rate, the less money that you could potentially make.
Working with a pensions advisor can help you find the most competitive deferred annuity rates.The advisors we work with have access to hundreds of rates and can quickly filter out the companies that offer poor terms or unsuitable rates.
How to calculate deferred annuity
With so many variables, it can be difficult to accurately calculate how much money you could make with a deferred annuity. One method would be to look at the amount you can afford to invest, then consider how long you could invest it for.
A tip here is to think about your future and the situations that might cause you to need the funds. If you invest your money, do you have other available income to fund your lifestyle or potential care costs?
Next, look at the interest rate that you are being offered and convert it to a decimal format. For example 5% interest would be 0.05. You will need to multiply the amount you can invest by the interest rate and the amount of years you will be in the contract.
Deferred annuity calculation example
To get a rough estimate of the amount of interest you could earn with a deferred annuity plan, you can do the following calculation:
Investment amount x interest rate x number of years in contract = the amount of interest you have made.
£100,000 x 0.05 x 10 = £50,000
Therefore, if your rate of interest was fixed at 5% for an agreed period of ten years, a £100,000 investment could equate to a £150,000 payout when the annuity matures.
For the current rates of each deferred annuity provider, speak to a pensions advisor. They can calculate your potential return with each of the different providers and can demonstrate how your return could be affected by fluctuating rates or the performance of the investment.
Are there alternative deferred annuity products?
Yes, there are other products that may be more suitable for you, depending on your circumstances and what it is you are looking to achieve from a deferred annuity plan.
Without prior knowledge of differentiating products, it can be hard to know which one is best suited for you. We can put you in touch with an advisor who would be happy to go over your options.
Alternative options with varying terms include:
Contingent deferred annuities
A contingent deferred annuity is an income guarantee that you can attach to your traditional stock and bond portfolio.
It allows buyers to have a guaranteed income without owning an annuity.
Group deferred annuities
A group deferred annuity is a type of contract which involves an entire group of employees.
Each employee pays a premium for an increment of a paid-up annuity and so the group deferred annuity is a series of single premium paid-up annuities.
Single payment deferred annuities
A single payment deferred annuity is a policy that allows the investor to save their money in an account and keep it there for an agreed period of time. During that period, interest will accumulate and the funds can be used as part of the companies investment strategy, so the amount in the account can increase of decrease. The funds are then released as a single lump sum.
Single deferred premium annuities
A single premium deferred annuity is a contract with an insurance company where you pay them a lump sum (known as a premium). In return, they promise to pay you a certain amount of money periodically (e.g. monthly) for the rest of your life.
Should I use a single premium deferred annuity calculator?
Online calculators can provide quick deferred annuity quotes but to make an informed decision, speak to a pensions professional. They can also compare the market for you and find you the best single premium deferred annuity rates.
Once they have sourced these rates, they can look at your circumstances and calculate how much you could potentially make with a single premium deferred annuity.
Flexible premium deferred annuities
A flexible premium deferred annuity has contractual terms that are more flexible for the account holder.
For example, the frequency of premium payments can range from monthly to annual or even as a one-time lump sum payment. This also applies to the payments received once the deferred annuity has matured and the investor can decide when and in what increments they can withdraw their payout.
Of course, as with any annuity product, there are pros and cons that should be considered before buying a flexible premium deferred annuity. One benefit would be that earnings on flexible premium deferred annuities are usually tax-deferred until they are withdrawn. A negative could be that if the account holder wants even more flexibility with regards to their contract, they may have to pay a surrender charge.
Deferred annuity FAQs
We’ve put together a list of common deferred annuity questions that may help you
What is a deferred annuity contract?
This is essentially an agreement between the person buying the deferred annuity and the company that will invest the funds.
The contract should clearly state the interest rate payable on the account and the length of time that that interest rate is secured for. It should also include information about any fees that may be charged as a result of the contract holder breaking any of the terms.
Can I withdraw my money at any time with a deferred annuity?
Some contracts do allow for a set number of withdrawals, but you may be charged a fee if you exceed this.
The amount you are charged can differ depending on the terms of your contract, so if you think you may need to dip into your account frequently, check your contracts thoroughly for terms that could prevent this.
It’s also helpful to know that if the amount of money you withdraw is more than 10% of the account’s overall total, you could also be charged a surrender fee.
For more information on deferred annuity withdrawals this, talk to an advisor.
Should I buy deferred annuities?
If you are considering investing in a deferred annuity scheme, it’s important that you understand the financial implications of your decision.
To feel confident about your decision and to get a comparison of the best available plans, always speak to a pensions advisor.
Should I seek advice if I’m buying a deferred annuity in the UK?
You should always seek professional advice before making the decision to buy a deferred annuity as it may have a significant impact your finances.
An advisor will be able to check the terms of your agreement and make you aware of any penalties or charges that you may occur in the future. Any paperwork can also be filled out for you and send to the appropriate department.
Speak to a pensions advisor about deferred annuities
If you would like a deferred annuity quote or would like to talk to a professional who can explain deferred annuities in more detail, please call us on 0808 189 0463 or make an enquiry here. A pension specialist will be happy to help with whatever questions you have and our advice is always confidential.