All annuities – both variable and fixed – provide income insurance for life. However, unlike a fixed annuity where you realize a set return on your investment and know at the time of purchase how much you can expect to receive each month, the rate of return on a variable annuity – and the amount you ultimately receive -- depends on market performance. You do, however, have some discretion as to when you begin receiving the money, so deferring payments from a variable annuity is, within limits, an option.
Waiting to receive payments from a variable annuity will help increase your account's value. Whether you fund the annuity with a lump sum payment or make payments over time, your money goes into mutual fund investments -- including stocks, bonds, money market instruments or a combination of the three-- that need time and favorable market conditions to grow. The degree of risk you assume when purchasing a variable annuity makes patience and a long-term commitment to the accumulation phase essential for building wealth.
Defer by Structure
Making the choice to defer payments from a variable annuity can come at the time you initially purchase the annuity or many years later. Defer payments early on by setting up the annuity as a deferred rather than an immediate annuity. This extends the time during which you pay into the annuity – the accumulation phase – and gives you more time to take advantage of market swings that have the potential to make the variable annuity worth substantially more at the time you decide to start taking payments.
Defer by Choice
You can defer payments by choice for 11 years or more past the time when you become eligible to start withdrawing money. Although you have the option to withdraw money at any time, doing so before age 59 ½ can be costly in terms of early withdrawal penalties. After reaching the qualifying age, however, you can choose to defer payments on a qualified variable annuity – one you purchase as part of an IRA -- until you reach the age of 70 ½ or for a non-qualified variable annuity, according to the terms of your contract. This is another way to extend the accumulation phase, especially if the market is not currently performing well.
Deferring payments on a variable annuity gives you time and additional options for growing your money. Most carry a "safety net" you can use if your risk tolerance level reaches its limit, if the time you have for deferment is running short and the market is on a downward trend, or if you simply want greater protection during the deferment period. This safety net is a provision that allows you to convert a portion of your variable annuity to a fixed annuity fund. By taking this action, you protect a portion of your future payments with a set rate of return while giving the remainder additional time to grow.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.