(Yahoo! Finance) If you’re thinking of purchasing an annuity for retirement income, know that they’re not all the same. A flexible premium deferred annuity offers a way to invest in an annuity, without having to pay a large lump sum premium all at once. Consider the pros and cons as you weigh different annuity options.
Flexible Premium Deferred Annuity Defined
Annuities can be used to save for retirement and create guaranteed income streams for later in life. An annuity can be immediate, meaning payments begin within one year of purchasing the annuity. However, they also can be deferred with payments beginning at some later date.
A flexible premium deferred annuity lets you fund your annuity with multiple premium payments. As a result, you don’t have to make one large lump sum premium payment. You make one initial premium payment, then additional payments at your own pace. There are no scheduled payments. The money in the annuity grows as you make new premium payments and accumulate interest.
This type of annuity is guaranteed and grows on a tax-deferred basis. You won’t pay taxes until you take payments. You can schedule payments, control the taxes due on earnings. and take payouts over time or as a lump sum. If you surrender your annuity early, you’ll get back your premiums minus withdrawals.
Advantages of a Flexible Premium Deferred Annuity
Unlike a single-premium annuity, which requires a big lump-sum payment, you can fund a flexible premium deferred annuity at your own speed. Say you purchase an annuity when you’re ine your 30s or 40. You’d have several decades to pay premiums and accumulate value before retirement. This could be a good option if you haven’t yet reached your peak income earning years. Also, it works if you can’t purchase an annuity with a large lump sum premium payment.
You can buy a flexible premium deferred annuity with as little as $25 up front. Compare that to a mutual fund, which may require a $1,000 or $2,000 initial investment. You can then contribute as much as you like to the annuity.
What Are the Disadvantages?
The annuity company may limit contributions during the accumulation phase, when the money in the annuity is growing with interest. Aggressive investors may not reach their goal if their annuity has a contribution cap.
Also, your annuity’s growth requires consistent payments. It’s similar to an online savings account or an individual retirement account. You’ll benefit from the interest earnings, but you can’t grow your principal investment without contributions.
As a result, a flexible premium deferred annuity might be better for someone who can pay premiums on a consistent basis. Even small amounts of $25 or $50 per month can add up. If you have a long enough window to pay the premiums until you retire, you may have substantial savings once you receive benefits from the annuity.
Choosing an Annuity Premium Option
Apart from flexible premium deferred annuities, you might choose to stick with a regular deferred premium annuity. You make a single lump-sum premium payment and your annuity payments begin at a date of your choosing. This kind of annuity assumes that you have enough cash on hand to make the one-time premium payment.
Among regular deferred annuities, a fixed annuity offers a guaranteed rate of return. An indexed annuity bases returns on the performance of an underlying stock market index. Finally, a variable annuity carries higher reward potential. It’s also extremely risky.
The Bottom Line
If you want guaranteed income for retirement, a flexible premium deferred annuity could help you get. They’ll let you pay your premiums as you see fit. However, the frequency with which you pay them can directly affect how much the funds in the annuity grow over time.