Immediate and deferred annuities can be described in the light of Annuities which are contracts signed between an individual and a financial institution. This contract establishes an agreement between the individual and financial institution where both the parties agree for an exchange of capital.
As per the scheme of the institution, the individual has to pay a particular deposit to the institution at regular intervals. Annuities can be compared to be similar to EMIs but the only difference between EMIs and Annuities are that EMIs are fixed monthly payments, whereas, Annuity scheme of payments are done after a given period, say, weekly, monthly, quarterly or annually are termed as annuities.
Immediate annuities are the schemes of different institutions that offer the returns on an immediate basis. This implies that the institution where you have signed up an agreement will start the reimbursement process at the earliest after you deposit the lump-sum amount upon. Immediate annuities do not require any accumulation period.
Thus, immediate annuities require you to deposit a lump-sum amount at one go, so that you can make a secondary income stream from it. Instead of depositing a series of premiums over time, immediate annuities require only a single deposit to be made. The distribution period commences as early as 12 months after the sum is deposited. Returns are provided from your investment as well as from the earnings you get under the scheme.
These plans go best for pension schemes after retirement. Once you deposit your savings to the financial institution, it continues to send a fixed amount every month to your account, just like you would receive your salary before retirement. Another added facility of immediate annuities is that the payments of taxes are calculated only on the additional earnings gained over time.
Deferred annuities demand a series of premiums over a tenure which is often termed as an accumulation period. You must be aware of recurring deposit schemes or mutual fund schemes or insurance policies that operate on the lines of deferred annuities.
A certain amount of capital needs to be invested either weekly, monthly or annually to build a fund from which you can claim reimbursement at the maturity of your policy. Long-term financial goals could be easily met with the help of deferred annuities. Taxes charged here do not begin until earnings or profits start flowing in.
Similarities between Immediate and Deferred annuities
- Both the features determine the period from which the distribution of capital or earnings begins.
- Both features are effective ways of building a fund for long-term goals like retirement and pension plans.
- If substantial efforts are applied then both could serve as a life-long stream of an income source.
- There is no limit for payments of annuities as unlimited contributions could be met.
- Both the scheme aims to provide surpluses to meet financial goals.
- Immediate annuities begin its distribution phase shortly, whereas, Deferred Annuities take long.
- Immediate annuities require you to deposit a lump-sum amount at one go, whereas, Deferred annuities demand series of premiums to be paid at intervals.
- Immediate annuities do not have any accumulation period, whereas Deferred Annuities do.
- Immediate annuities go well with pension plans, whereas, deferred annuities could help you to meet various financial goals by its flexibility in reimbursement procedure.
- Taxes for immediate annuities begin as soon as the earnings flow in, whereas, for Deferred Annuities, until any earnings are received, you are not charged with any extra payments of taxes.
Thus, we have drawn out a clear picture on both the classifications of annuities for giving you a clearer perspective and a better understanding of each of the topic. While choosing which scheme to opt for, Deferred Annuities are a preferred choice among the middle-class masses, whereas immediate annuities perfectly suit the aristocrats. For more assistance, you can contact GCC Filings and the company has skilled professionals who will guide you further.