A variable annuity is usually classified into two different types depending on the when payments will be administered to the investor. The two types of variable annuity are deferred variable annuity which involves payments at a later date, or immediate variable annuity which involves payment soon after purchase, usually within a month or a year.
In a deferred variable annuity, the investor is not paid immediately as the investment is given time to amass earnings from the various investment options. Investment is placed into a sub-account and the value of this account increases and decreases in value depending on the performance of the investment assets in the market. The investor also has the option of adding different amounts of money in their account depending on their financial situation at a particular time and the account increases in value until the payout phase which is usually at retirement. The individual can ask for an early withdrawal though this is subject to a ‘surrender charge’ during the entire surrender period. But if they do not withdraw any amount of money until they retire, they are likely to get a good return on their investment.
Deferred variable annuity is exempt from task during the accumulation phase. This means that the individual can add funds into the account and its value can increase due to good performance of the investment. They can even transfer the funds from one investment option to another without paying any tax to the government. This feature of a deferred variable annuity separates it from other investment options and it gives the investor the opportunity to increase the value of their account without worrying about income taxes so that they can have financial security after they retire. The investor starts paying tax after they start withdrawing funds from the account, and most investors take advantage of this tax deferment to accrue as much income in their account as possible.
This type of investment is the best for a retirement plan when compared to alternatives such as a mutual fund. This is mostly because of the fact that tax is not charged on accumulating funds. It is best suited for investors who are yet to retire because of the risks involved. This is because in a deferred variable annuity, the investor risks getting full returns or losing a lot because return on investment is linked to the unpredictable market performance.
Individuals should always know what are the terms of their deferred variable annuity as well as the percentage rate of the ‘surrender charge’ of their account before they purchase a variable annuity. This is the only way they can be able to make a sound decision on whether this option is best for them.
After the investor has retired, he or she can choose to withdraw all the funds in one lump-sum amount or the amount can be calculated so that the individual receives payment for a certain period of time. There is also the option of converting the funds so that the investor is paid for as long as they live.