What is a deferred annuity?

Find out how a deferred income annuity works — and if it’s the right choice for your retirement

Last updated September 18, 2025

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It takes decades of hard work to build up retirement savings. But at some point, you'll want to stop working and enjoy the fruits of your labor. Before that day comes, you have to think about two important questions:

How will you turn your retirement savings into a monthly income you can live on?
How can you make sure your retirement income doesn’t run out?

These are real concerns for many Americans. Research from the Insurance Retirement Institute found that almost half of workers — 44% — don’t believe they’ll have enough income to last throughout retirement.¹ Annuities can help by taking a sum of money and turning it into a predictable stream of income payments guaranteed to last for the rest of your life. There are several types of annuities, and most are actually deferred. That simply means the annuity doesn’t start paying out right away: your income payments are deferred for at least one year. Otherwise, it would be an immediate annuity.

In a nutshell: A deferred annuity is a binding contract with an insurance company to help your money grow tax-free for a period of time, then convert it into a series of smaller, guaranteed income payments.

Some people refer to annuities as “private pensions” because the contract can be made to work like a pension, providing a regular stream of monthly income that lasts for a set number of years, or even the rest of your life. There are several types of annuities to choose from, depending on how you want your money to grow and get paid out as income. We'll explore some of those options as we go into more detail about how deferred annuities work.

A deferred annuity has two phases

These contracts have two primary parts: the accumulation phase and the payout phase. During the accumulation phase, you pay into the annuity and your money grows tax-deferred, allowing your funds to grow more quickly. The payout phase begins when you start receiving income payments from the insurance company.

You can choose different ways to pay into an annuity

Generally speaking, there are two ways to make premium payments into a deferred annuity: single premium or flexible premium. With a single-premium deferred annuity, you make a one-time, lump-sum payment, and the entire amount grows over time until you decide to withdraw. This can be a good option for people who have just sold a large asset, such as a business or property, and want to invest a chunk of that money to secure future retirement income.

A flexible-premium deferred annuity is more like a savings or retirement account that you gradually build up over time with multiple periodic payments. As the name implies, this option gives you lots of flexibility. For example, you could decide to pay in a certain amount in each paycheck, make annual payments that vary based on your bonus — or do both.

You can choose different ways to have your money grow

3 types of deferred annuities

Choose different ways to receive annuity payments

Deferred annuities give you lots of options, and the choices don’t stop when it comes to how long you want to receive income. A Guardian deferred annuity actually gives you five different ways to take income payments from your annuity:

Life Annuity without Guaranteed Period: This is also called a “Straight life” annuity. Payments are made for the lifetime of the annuitant (i.e., the annuity owner), but that’s all. This method provides the highest regular lifetime payouts, but income stops when the owner passes away, and there’s no payment made to beneficiaries. So, for example, if the owner passes away in the first years of taking income, the total payout could be much less than what was paid in.
Life Annuity with Guaranteed Period: Annuity payments are made for the annuitant’s lifetime. But, if the annuitant dies during a selected “guaranteed period” (which can be 5 to 30 years, subject to age restrictions), benefit payments continue to be made to a beneficiary for the remainder of the guaranteed period.
Period Certain Only (5 through 10 Years) — This option provides annuity payments for a set amount of time between 5 and 10 years, and payments continue even if the annuitant dies before the period certain ends.
Joint Life Annuity with Survivor Benefit — Annuity payments are made for the life of two individuals (called joint annuitants, who must be spouse). This option can be issued without a guaranteed period, life with a guaranteed period of 5 to 30 years.

There are certain age limitations, qualifications, and other conditions that you should understand before signing an annuity insurance contract. Different providers offer different ways to take income from a deferred annuity, and each method offers different advantages and disadvantages depending on your specific needs and financial goals. It's also important to note that deferred annuities typically come with surrender charges that can be quite steep if you want to make any modifications after your contract has been signed.

Optional riders provide added flexibility and benefits

Deferred annuities can offer a variety of rider options for added benefits, such as guaranteed minimum payments. These come at an additional cost, but they can provide valuable advantages depending on your individual needs and preferences.

For example, a guaranteed minimum income benefit rider can ensure you’ll have a set amount of income for the rest of your life, regardless of the investment performance of the funds in your annuity. When you customize your deferred annuity with the right riders, you can further enhance its benefits to better suit your financial goals and retirement needs.

Income tax advantages and considerations

Deferred annuities offer a number of potential tax advantages. For one thing, unlike retirement accounts, there are generally no limits on how much you can pay into an annuity, making it a good choice for those who are maxing out other retirement savings vehicles. Like an IRA or 401(k), the earnings within the annuity grow tax deferred.

Other annuity tax rules vary depending on whether the annuity is qualified or non-qualified. Qualified annuities are purchased with pre-tax dollars (like contributions to an IRA or 401K), and withdrawals (both contributions and earnings) are generally taxed as ordinary income. Non-qualified annuities are purchased with after-tax dollars (like funds put in a regular savings account, as opposed to an IRA); but when you withdraw from a non-qualified annuity, you generally only have to pay taxes on the earnings portion, according to your ordinary income tax rate. In either case, a substantial portion of your tax bill can be deferred until you take withdrawals in retirement, when you may be in a lower tax bracket.

If you make an early withdrawal or cancel the contract before age 59 ½ , the IRS may impose a 10% early withdrawal penalty and income tax on the gains. Additionally, surrender charges may apply if a lump sum withdrawal or contract cancellation is made within the contract’s stated surrender charge period. It’s important to discuss these tax implications and other considerations with your financial advisor when planning your retirement finances and deciding if a deferred annuity is right for your needs.

Potential drawbacks of deferred annuities

While deferred annuities offer numerous benefits, like any investment vehicle, there can be some potential drawbacks as well. These can include:

Limited financial flexibility: Because annuities are designed to provide a guaranteed income stream in the future, there are restrictions on how you can access funds before the annuity starts paying out. For example, there are typically early withdrawal penalties which make it hard to access money in an emergency.
High fees and charges: These fees can include administrative fees, surrender charges, mortality expenses, and commissions which may limit your investment returns, so it’s important to assess the costs of a deferred annuity in relation to its benefits before investing.
Complexity: Deferred annuity contracts are usually lengthy documents that can be difficult to comprehend, especially for a variable annuity or fixed indexed annuity. So, working with a financial advisor who can help you fully understand the features, benefits, and potential drawbacks of the deferred annuity contract you're considering is essential.

Is a deferred annuity right for you?

A deferred annuity can be an important part of your retirement planning strategy and an added way to save money on a tax-deferred basis along with 401(k) plans, whole life insurance cash value, and other assets. But unlike those vehicles, it can guarantee that no matter how long you live, you won’t outlive all your annuity income. If that’s something you’re concerned about, we suggest talking to a financial professional to see if a deferred annuity could be right for your needs.

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Frequently asked questions about deferred annuities

A deferred annuity has two phases: the accumulation phase and the payout phase, which is deferred for at least one year after purchasing the annuity. During the accumulation phase, one or more premium payments are made. The funds receive interest or are invested, growing tax-deferred. After a certain point, the annuitant can choose to receive payments that can be structured to last for life or a set period of time.

A deferred annuity combines many of the advantages of a 401(k) plan and a pension. Like a 401(k), it’s a tax-advantaged way to save money for retirement a few years down the road – and like a traditional pension, it can provide regular income that lasts for the rest of your life. However, if you’ve already built a nest egg and want to convert it into a stream of income that starts right away, consider getting an immediate annuity.

The primary disadvantages of deferred annuities are cost, flexibility, and complexity. There can be higher charges and fees than other investment vehicles, and there are typically surrender charges, meaning that you have to pay penalties if you want to access your money before a certain period of time. Also, each annuity is a legal contract customized to the needs of the owner, and it spells out numerous terms and conditions that can be difficult to comprehend without help from a financial professional, especially for variable annuities and fixed index annuities.

Like any investment vehicle, there are pros and cons. Annuities can be complex and costly compared to other retirement savings vehicles, and can limit access to your money in certain circumstances. On the positive side of the ledger, they can provide valuable guarantees not offered by other vehicles, primarily lifetime retirement income you can’t outlive. That makes it a worthwhile investment for many people, but the ultimate decision about whether it’s a good investment comes down to your personal needs and retirement goals.

Need more information?

Resources to help you learn and compare.

Starting to think about retirement? Try our retirement planner
Do you need income now or later? Learn about immediate and deferred income annuities
What’s the definition of an annuity?

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1 Retirement Readiness Trends: Financial Preparedness Snapshot, Empower, February 2025.

This material is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.

This material is for information use only. It should not be relied on as the basis to purchase a variable, fixed or immediate annuity or to implement a retirement strategy.

The information provided herein is not written or intended as investment, tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. This information supports the promotion and marketing of annuities.

There are no additional tax benefits if you purchase an annuity to fund an IRA or qualified retirement plan. Therefore, an annuity should only be purchased in an IRA or qualified plan if you value some of the other features of the annuity and are willing to incur any additional costs associated with the annuity to receive such benefits.

Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel.

Variable annuities are long term investment vehicles designed to help investors save for retirement and involve certain contract limitations, fees, expenses and risks, including possible loss of the principal amount invested. The investment return and principal value may fluctuate so that the investment, when redeemed, may be worth more or less than original cost. As with many investments, there are fees, expenses and risks associated with these contracts. All guarantees including the death benefit payments are dependent upon the claims paying ability of the issuing company and do not apply to the investment performance of the underlying funds in the variable annuity. Assets in the underlying funds are subject to market risks and may fluctuate in value.

Withdrawals of taxable amounts from a variable or fixed deferred annuity will be subject to ordinary income tax and possible mandatory federal income tax withholding. If withdrawals are taken prior to age 59½, a 10% IRS penalty may also apply. Withdrawals may also be subject to a contingent deferred sales charge.

Variable annuities and their underlying variable investment options are sold by prospectus only. Investors should consider the investment objectives, risks, charges and expenses carefully before investing. This and other information are contained in the prospectus or summary prospectus, if available, which may be obtained from your investment professional. Please read it before you invest or send money.

Fixed and variable annuities are issued by The Guardian Insurance & Annuity Company, Inc. (GIAC). All guarantees are backed exclusively by the strength and claims paying ability of GIAC. Variable annuities are issued by GIAC, a Delaware corporation, and distributed by Park Avenue Securities LLC (PAS). Both GIAC and PAS are wholly owned subsidiaries of The Guardian Life Insurance Company of America, 10 Hudson Yards, New York, NY 10001.

Not a Deposit | Not FDIC or NCUA Insured | May Lose Value | No Bank or Credit Union Guarantee

What is a deferred annuity?

A deferred annuity has two phases

You can choose different ways to pay into an annuity

You can choose different ways to have your money grow

Fixed annuities

Variable annuities

Fixed index annuities

Choose different ways to receive annuity payments

Optional riders provide added flexibility and benefits

Income tax advantages and considerations

Potential drawbacks of deferred annuities

Is a deferred annuity right for you?

Get help figuring out if deferred annuities are right for your retirement goals

Have an annuity with Guardian?

Frequently asked questions about deferred annuities

Need more information?

Other products you may be interested in

Life Insurance

Disability Insurance

Dental Insurance

A deferred annuity has two phases

You can choose different ways to pay into an annuity

Choose different ways to receive annuity payments

Optional riders provide added flexibility and benefits

Income tax advantages and considerations

Potential drawbacks of deferred annuities

Is a deferred annuity right for you?

Frequently asked questions about deferred annuities

What is a deferred annuity?

A deferred annuity has two phases

You can choose different ways to pay into an annuity

You can choose different ways to have your money grow

Fixed annuities

Variable annuities

Fixed index annuities

Choose different ways to receive annuity payments

Optional riders provide added flexibility and benefits

Income tax advantages and considerations

Potential drawbacks of deferred annuities

Is a deferred annuity right for you?

Get help figuring out if deferred annuities are right for your retirement goals

Have an annuity with Guardian?

Frequently asked questions about deferred annuities

How does a deferred annuity work?

What is the benefit of a deferred annuity?

What are the disadvantages of a deferred annuity?

Is a deferred annuity a good investment?

Need more information?

Other products you may be interested in

Life Insurance

Disability Insurance

Dental Insurance

Disclaimer8367279.1•Exp 9/27angle down

A deferred annuity has two phases

You can choose different ways to pay into an annuity

Choose different ways to receive annuity payments

Optional riders provide added flexibility and benefits

Income tax advantages and considerations

Potential drawbacks of deferred annuities

Is a deferred annuity right for you?

Frequently asked questions about deferred annuities