Immediate vs Deferred Annuity Comparison: Which One Fits

Planning for retirement means choosing the right tools to create a steady income. One powerful option is an annuity, which allows you to turn your savings into regular payments. But when it comes to annuities, you’ll hear two main terms: immediate annuity and deferred annuity.

In this guide, we’ll explain the difference between the two. You’ll learn how each one works, who they’re best for, and how to decide which is right for your financial future.

What Is an Annuity?

An annuity is a contract with an insurance company. You give them a lump sum or a series of payments, and in return, they agree to pay you money on a regular schedule—monthly, quarterly, or annually—either immediately or sometime in the future. The goal is to turn your savings into a reliable income stream, often for retirement.

Annuities can act like a private pension, especially if you don't have one from an employer. They’re designed to give you peace of mind by providing predictable payments that you can’t outlive, which is especially important as life expectancy continues to rise.

Why People Use Annuities

There are several reasons why retirees—and even pre-retirees—turn to annuities:

Create income during retirement: Annuities offer guaranteed payments, which can serve as a replacement for a paycheck. This helps cover everyday expenses like housing, groceries, or healthcare.Protect savings from market losses: Some types of annuities (like fixed or fixed indexed annuities) protect your principal, meaning you won’t lose money if the stock market drops. This appeals to people who are near retirement and can't afford to take big risks.Delay taxes on growth: With most annuities, your money grows tax-deferred. That means you won’t pay taxes on earnings until you withdraw the money. This allows for compounding growth and potentially lower taxes in retirement when you're in a lower income bracket.Ensure lifetime income: One of the biggest fears people have about retirement is outliving their savings. Annuities can be structured to pay you for the rest of your life, no matter how long you live. Some even include benefits for your spouse or beneficiaries.Create legacy benefits: Many annuity contracts allow you to add a death benefit, ensuring your beneficiaries receive money if you pass away. This can provide additional peace of mind, especially if you’re worried about leaving something behind for your family.Customize your financial plan: Annuities aren’t one-size-fits-all. Depending on your risk tolerance, goals, and timeline, you can choose features like inflation protection, long-term care riders, or market participation.

Two Main Types: Immediate and Deferred

There are two main types of annuities: immediate annuities and deferred annuities. Each serves a different financial purpose, depending on when you want your income to begin.

Immediate Annuities: These are designed for people who need income right away. You make a lump-sum payment to the insurance company, and they begin sending you income—typically within 30 days to 12 months. It's ideal if you’re already retired and want to convert part of your savings into guaranteed cash flow without managing investments.Deferred Annuities: These allow your money to grow before you start taking income. You invest either a lump sum or make contributions over time, and your money accumulates tax-deferred. When you’re ready—usually years later—you can start drawing income, either through scheduled withdrawals or by turning the annuity into a regular paycheck for life. Deferred annuities work well if you’re still working or several years away from needing retirement income.

Each type has its own set of features, benefits, and trade-offs. Immediate annuities are simpler but less flexible. Deferred annuities give you more growth potential and optional features, but often come with longer surrender periods and more complex fee structures.

Flexibility and Customization

Modern annuities come with a range of customization options. You can select:

Fixed or variable interest creditingIndexed returns linked to a market index like the S&P 500Income riders that guarantee a certain payout in the futureJoint annuitant options that cover both you and your spouseLong-term care riders to help pay for future medical needs

This flexibility allows annuities to play a role in many retirement strategies, whether you're looking for guaranteed income, principal protection, tax deferral, or even legacy planning.

What Is an Immediate Annuity?

An immediate annuity starts paying you income within one year of purchase. You usually pay one lump sum to the insurance company, and they start sending you checks every month, quarter, or year.

Key Benefits:

Income starts right awayGreat for retirees who need cash flow nowPayments can last a set number of years or for lifeSimple to set up and easy to understand

You can choose options like:

Life only: Pays as long as you liveJoint life: Covers both you and your spousePeriod certain: Pays for a guaranteed number of years

What Is a Deferred Annuity?

A deferred annuity starts later—maybe in 5, 10, or 20 years. This gives your money time to grow. During the waiting period, your money earns interest or market-linked returns.

Benefits of Deferred Annuities:

Great for people who are still workingOffers tax-deferred growthYou control when income beginsCan grow faster with compound interestMay include a death benefit for your heirs

Types include:

Fixed: Pays a steady interest rateVariable: Invests in funds; returns vary with the marketFixed indexed: Tied to a market index, like the S&P 500, with principal protection

Immediate vs Deferred Annuity: Quick Comparison

FeatureImmediate AnnuityDeferred AnnuityWhen Income StartsWithin 12 monthsYears laterPurposePaychecks nowGrow money for laterRisk LevelVery lowVaries by productBest ForRetirees todayPeople planning for future retirementGrowth PotentialFixed paymentsHigher growth with crediting options

Income and Taxes

An immediate annuity provides guaranteed income quickly. You won’t see growth like in a savings account, but the money is safe and predictable.

A deferred annuity allows your money to grow over time. You can wait until retirement—or even later—to take payments. This means more time for your balance to increase.

Tax note: Both types are tax-deferred. That means you don’t pay taxes on gains until you take money out. If you withdraw prior to age 59½, you may face IRS penalties and surrender charges.

Flexibility and Access

Immediate annuities are simple, but rigid. Once you buy one, you usually can’t take the money back. There’s no access to the lump sum.

Deferred annuities are more flexible. Many offer features like:

10% annual withdrawals with no penaltyDeath benefit that passes money to your familyLong-term care riders or options for early withdrawals due to illness

This makes deferred products more useful for long-term planning.

Cost and Fees

Immediate annuities often have no direct fees. What you give up is control of your principal.

Deferred annuities may come with fees, including:

Admin or account maintenanceInvestment fees (for variable products)Charges for optional riders (like guaranteed income or life insurance company guarantees)

Always read the fine print and ask a financial professional for an explanation.

Real-Life Examples

Example 1 – Immediate Annuity

 John is 68, retired, and wants a steady paycheck. He buys an immediate annuity with $200,000 and starts getting $1,100/month for life. He no longer worries about outliving his savings.

Example 2 – Deferred Annuity

 Lisa is 52 and still working. She wants income at 65. She invests in a fixed indexed annuity with guaranteed minimum growth and crediting options tied to the market index. At retirement, she turns on a guaranteed income rider and gets steady checks for life.

Which One Should You Choose?

Choose an immediate annuity if:

You need income nowYou’ve already retiredYou want a simple, worry-free plan

Choose a deferred annuity if:

You have time to grow your savingsYou’re still workingYou want flexible income laterYou like the idea of market-linked growth with principal protection

Can You Combine Both?

Yes. Some people use both annuities in one retirement plan. For example:

An immediate annuity to cover fixed costsA deferred annuity to grow money for later years

This creates layers of income that help you plan for different retirement phases.

Final Thoughts

Both immediate and deferred annuities offer real value in retirement planning. They provide peace of mind, tax advantages, and guaranteed income options. The right choice depends on when you need income, how long you have to invest, and what level of control you want.

Always consult a qualified professional to see which annuity product is right for your needs. Whether you’re looking for stability, growth, or legacy protection, annuities can help you secure your financial future.

Looking for guidance on how to align your financial plan with your ideal retirement location? Connect with a trusted advisor today and take the first step toward building a secure, personalized retirement strategy.