When you purchase an immediate annuity, you are depositing a lump sum of money with the insurance company, and in return you receive a guarantee that they will pay you income spread out over a defined period of time, or for the remainder of your life. These payments will come to you in regular intervals and the size of the payment is based on your initial lump sum investment and your current age. Depending on the type of annuity you purchase, your annuity income payments may remain stable or vary from time to time.
Why would someone buy an immediate annuity? Immediate annuity investors are interested in guaranteed income and the security of knowing the income will continue throughout their retirement. Immediate annuity investors do not require a high level of liquidity in their investment, and intend on leaving their principle in the annuity for an extended period of time.
When you purchase a deferred annuity, you deposit a lump sum of money with an insurance company, and then it is left untouched and allowed to grow tax deferred until a contractually agreed upon date. Although all deferred annuities enable you to access any or all of your money at any time, withdrawals are usually discouraged by imposing surrender fees. However, almost all deferred annuities allow you access 10% of your annuity value annually without incurring a surrender charge.
Why would someone buy a deferred annuity? A deferred annuity investor has a lump sum of money they can invest and do not need immediate liquid access to it. They are looking for an investment that will provide good growth and avoid taxes until they withdraw the money after they are 59.5 years old.