What is the difference between immediate and deferred annuities?

Immediate annuities are designed to start making payments to the annuitant soon after the initial investment is made, often within a year or sometimes even sooner. This feature allows individuals to convert a lump sum of money into a stream of income almost immediately, which can be particularly advantageous for those seeking to supplement their income right away, such as retirees who need immediate cash flow.

On the other hand, deferred annuities do not commence payments until a specified future date, allowing the investment to grow on a tax-deferred basis during the accumulation phase. This delay in payout can be beneficial for those who wish to accumulate more funds over time, taking advantage of longer growth periods before they begin receiving payments.

This fundamental distinction between immediate and deferred annuities is crucial in understanding how each type serves different financial goals and timelines. Immediate annuities are aligned with immediate income needs, while deferred annuities are suitable for long-term financial planning.