If you want to buy an annuity but do not have a lump sum, a flexible premium deferred annuity may be an option.
Different types of annuities can be immediate or deferred. Immediate annuities may begin payments within a year of purchase. Deferred annuities typically begin payments after at least one year. The money used to buy an annuity is called a premium. You can pay a single premium as a one-time lump sum or make flexible premiums through multiple payments over time.
So, a flexible premium deferred annuity is an annuity that you pay into incrementally over time and that you defer receiving payments from until a later date. If this option seems like a good fit, it helps to understand how it works and what to consider before buying.
How Do Deferred Annuities Work?
Immediate annuities are single premium annuities because they are funded with a lump sum and begin paying income right away.
Deferred annuities offer more funding options:
- Single premium deferred annuity (SPDA): Funded with a lump sum
- Flexible premium deferred annuity (FPDA): Funded with multiple payments over time
Deferred annuities have two main phases:
- Accumulation Phase: You make premium payments. The annuity’s value may grow from additional contributions and credited interest.
- Payout Phase: You begin receiving income payments.
How your money grows depends on the type of annuity:
- Fixed Annuity: Earns a fixed interest rate
- Variable Annuity: Allows you to invest in subaccounts
- Indexed Annuity: Growth is tied to the performance of a market index
Keep in mind that investment options cannot guarantee growth or protect principal. Investments may lose value, and past performance does not guarantee future results.
If a lump sum is not practical, a flexible premium deferred annuity allows you to contribute smaller amounts over time. If you prefer to use a lump sum, a single premium deferred annuity may be a better fit.
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What Are the Potential Advantages of Flexible Premium Deferred Annuities?
A flexible premium deferred annuity may offer:
- Lower Initial Premium: You may be able to start with less money than required for a single premium annuity.
- Capital Retention: You can keep some funds available for other needs and contribute more later.
- Payment Flexibility: Premiums can often be made on a schedule that works for you.
- Growth Potential Over Time: You can start with smaller payments earlier in life and increase contributions as income grows.
What Are the Potential Drawbacks of Flexible Premium Deferred Annuities?
Consider these possible limitations:
- Contribution Limits: Your contract may limit how much you can contribute.
- Impact of Missed Payments: If you do not make contributions, growth may be limited.
- Surrender Charges: If you cancel the contract during the surrender period, you may owe surrender charges.
- Early Withdrawal Penalty: If you withdraw funds before age 59 1/2, you may owe a 10 percent federal penalty in addition to ordinary income taxes.
Because there are several types of annuities, the right choice depends on your needs and timeline. A financial representative can help you review your options.
Final Thoughts
A flexible premium deferred annuity can help you build retirement income over time without a large upfront payment, while offering tax-deferred growth and flexible contributions. However, limits, surrender charges, and early withdrawal penalties may apply. Since annuities come in different types, consider speaking with a financial representative to review your options and choose one that fits your needs.
Maximize your savings over time with a flexible premium deferred annuity. Start Your Free Plan
