Annuity (European Financial Arrangements) - Deferred Annuity

The second usage for the term annuity came into its own during the 1970s. This is a deferred annuity and is a vehicle for accumulating savings, and eventually distributing them either as an immediate annuity or as a lump-sum payment. Note that this is different from an immediate annuity.

Under the heading of deferred annuities, there are contracts which may be similar to

• bank deposits in that they offer the buyer interest on their money and a guaranteed return of capital, or
• stock index funds or other stock funds (such as ETFs), where the growth or shrinkage of the account depends on the performance of the market.

Contracts may also be linked to other investments such as property (real estate) or government bonds, or any combination of the above selected by the investor or his advisors. All varieties of deferred annuities owned by individuals have one thing in common in many jurisdictions: any increase in account values is not taxed until those gains are withdrawn. This is also known as tax-deferred growth.

To complete the definitions here, a deferred annuity where the benefits are fixed at outside, either in terms of a lump sum or an annuity, can be called a fixed deferred annuity. A deferred annuity that permits allocations to stock or bond funds and for which the account value is not guaranteed to stay above the initial amount invested is called a variable annuity.

By law, an annuity contract can only be issued by an insurance company. They are distributed by, and available for purchase from, duly licensed bank, stock brokerage, and insurance company representatives. Some annuities may also be purchased directly from the issuer, i.e., the insurance company writing the contract.

In a typical immediate annuity contract, an individual would pay a lump sum or a series of payments (sometimes called annuity considerations) to an insurance company, and in return pay the annuitant a series of periodic payments for the rest of their life. The exact terms of an annuity product are set out in the contract.

In common with other types of insurance contract, both immediate and deferred annuities will typically pay commission to the sales person (or advisor).

A wide variety of features have been developed by annuity companies in order to make their products more attractive. These include death benefit options and living benefit options.