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Deferred annuity vs. immediate annuity: Comparing the differences

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Approaching retirement can come with a range of emotions. You may feel gratitude and joy as you reflect on what you've accomplished for yourself and your family—but you also may feel uncertainty. As the market and economy fluctuate, it's natural to wonder if you'll have enough money to last the rest of your life.

Annuities can help add security to your retirement plan, and there are several types to consider. Before deciding if an annuity might fit into your retirement plan, it helps to understand the differences between two major categories: deferred annuities vs. immediate annuities.

We’ll cover:

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What is a deferred annuity?

A deferred annuity is an insurance contract that helps provide retirement income over a specified period of time in exchange for a lump-sum or ongoing premium payments. Depending on how far away from retirement you are, you can defer your income stream until later to give your investment time to grow during an accumulation period.

More commonly, payouts are set to start when or after you expect to retire.

What is an immediate annuity?

An immediate annuity is an insurance contract funded by a single lump-sum payment for a fixed payout in the near-term. You decide on the frequency and duration of your payouts when you buy it.

Your payouts can start in as early as 30 days but must be taken within the first year. This aspect makes it an ideal option if you're nearing or already in retirement and want to set up an income stream right away.

5 differences between deferred & immediate annuities

These two types of annuities differ in significant ways. Consider what distinguishes a deferred annuity from an immediate annuity as you explore the right retirement strategy for you.

1. Premium payment options

Payment options for immediate annuities are more limited than deferred annuities.

Immediate annuities require a single, lump-sum premium

Immediate annuities must be funded with an upfront, single premium that typically comes from retirement accounts, such as a 401(k) or IRA. It does not have the option for ongoing premium payments to fund the account.

Deferred annuities have two premium payment options

With a deferred annuity, you have the option to fund it with a single lump sum at the start or pay premiums over a period of time. Making regular payments could put less of a strain on your budget than tying up a big chunk of your money at once.

2. When payouts start

As their names suggest, a key difference between immediate and deferred annuities is the timing of when payouts begin.

Immediate annuity payouts start in the near-term

Immediate annuities usually must start paying out within 12 months of purchase. This near-term period tends to benefit people who are approaching or already in retirement and want to close gaps in their income stream to alleviate concerns they'll outlive their retirement savings.

Deferred annuities payouts often start in retirement

While deferred annuities can start paying out as early as a year after purchase, they also allow payout dates that start years or even decades later. Having a long-term accumulation phase can make a deferred annuity an attractive option if you have plenty of time before retirement to build potential earnings growth.

3. Earning potential may vary

The accumulation period of deferred annuities typically offer more opportunity for tax-deferred growth potential. However, the earning potential will depend on the type of annuity you choose.

Immediate annuities don’t have an accumulation period

Generally, an immediate annuity has less time to gain earnings because there is no accumulation period and the payouts start much sooner. But if your priority is a consistent income stream right away that reflects more growth potential than most savings accounts, an immediate annuity could meet your needs.

Deferred annuities have greater earning potential due to an accumulation period

Deferred annuities can give you the security of fixed payouts later that are based on the accumulated growth. Types of deferred annuities include:

  • Variable deferred annuities: These offer greater growth potential and a larger degree of risk. You'll select investment subaccounts based on your financial goals and risk tolerance. Your annuity’s value will fluctuate daily based on the performance of the subaccounts you select. You have greater growth potential than a fixed annuity but a greater chance of loss if your subaccounts drop in value.
  • Deferred income annuities: Provides you with preset payments that begin at a specified point in time that you select at the time of application—typically between two and 30 years away. These annuities involve neither specified fixed nor variable rates of return for you. Instead, you pay the premium, and after the allotted period of time, the insurer makes payments of a fixed amount back to you. They have the potential to exceed what you paid in since the payments are guaranteed for as long as you live.

4. Both types of annuities offer potential tax benefits

Immediate and deferred annuities offer tax-advantages that may help you stay tax-efficient in retirement.

Immediate annuity tax benefits

Depending on the type of immediate annuity you choose and whether you're funding the annuity with non-qualified dollars, such as from a pension, only a portion of your annuity income is taxable. This may help reduce your tax bill in retirement and continue to defer taxes on part of your retirement savings.

Deferred annuity tax benefits

With deferred annuities, any earnings received during the accumulation phase grow tax-deferred. (However, with a variable annuity, which is tied to investment subaccounts, growth is not guaranteed.) You won't pay income taxes on your annuity gains until you receive the payouts, which helps the earnings to compound over time.

5. Both types of annuities typically offer a death benefit

If you're concerned about supporting your family after your death, annuities might be a reliable way to help ensure their care after you're gone.

Immediate annuity death benefits

Most immediate annuities give you the opportunity to include a death benefit in your contract. If you opt for a guaranteed payment period and die before it concludes, your beneficiaries will receive the remainder of your scheduled payouts.

Deferred annuity death benefits

A deferred annuity typically has a death benefit where the insurance company will return at least the premiums you paid (less any partial surrenders) to your beneficiaries if you pass away before your annuity’s value is depleted. Once you elect an annuity payout, the death benefit will depend on the option you selected.

Deferred annuities vs. immediate annuities comparison chart

Deferred annuities
Immediate annuities

How it's funded

Lump-sum or a series of premiums
Lump-sum premium only
When payouts begin
At least 12 months after the contract is issued; meant to be a long-term investment
Within 12 months of the contract being issued
Earning potential
Accumulation period can mean a longer time for earnings to grow; potential earnings will vary based on the type of annuity you choose
No accumulation period—less time for earnings to grow
Growth is tax-deferred; taxation begins once payouts start
Only the annuity payments you receive in that year are taxable
Death benefit
May include one—the remaining balance could be passed on to your loved ones
May include one—the remaining balance could be passed on to your loved ones

Get help to secure your retirement income

When it comes to financial security and taking care of your family, there's no one-size-fits-all approach. A deferred annuity can fit into your plan if you're a few years from retirement and want to leave an inheritance. Immediate annuities could be the better option if you need to cover your living expenses in retirement or simply want a predictable income.

Deciding between a deferred annuity vs. an immediate annuity involves weighing a lot of factors that are specific to your circumstances. An experienced professional can help you understand your best options based on your risk tolerance, time horizon, needs and goals. Connect with a Thrivent financial advisor to discuss how an immediate or deferred annuity may fit into your retirement plan.

Annuities are intended to be long-term, particularly for retirement. Product availability and features may vary by state.

Surrenders or partial withdrawals/surrenders may be subject to income taxes and/or surrender charges.

Guarantees are based on the financial strength and claims paying ability of Thrivent.

Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits. Thrivent and its financial advisors do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable annuity contract and underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing. Available at