What is a deferred annuity?

A deferred annuity is defined as an investment vehicle that allows an individual to accumulate funds on a tax-deferred basis until a specified time when payments begin. This means that the annuity does not begin to pay out until an agreed-upon future date, often years after the initial investment is made. The growth during this accumulation phase is typically free from taxes until the money is withdrawn.

The key feature here is the emphasis on the delay in payments, as opposed to immediate payouts; this is what sets deferred annuities apart from other types. When you purchase a deferred annuity, you either make a lump sum deposit or a series of contributions over time, and the funds grow based on the terms of the annuity until the payout phase starts, which can be sequenced based on your retirement plans or other financial strategies.

In contrast, an annuity that pays immediately after purchase focuses on providing income right away and has a different function and appeal for financial planning. Annuities that are limited in duration or do not require further payments do not correctly capture the essence of what a deferred annuity entails, as they either imply restrictions on time or payment structure that are not inherent in the deferred annuity concept.