A fixed deferred annuity is an investment structure that allows a person to put money into a system with the intention of getting more money back at a later time. In most cases, a person pays small amounts of money into an account that gains interest. At some later date, the investor will stop paying money into the system and begin withdrawing money. With a fixed deferred annuity, the money withdrawn is always more than what was placed into the system. These plans are a common method of saving for retirement.
The term fixed deferred annuity is a combination of several financial ideas. An annuity is a scheduled series of payments. Generally, annuity benefits are paid by insurance companies either as a benefit, such as in the case of life insurance, or in the case of a settlement, such as an accident, injury or wrongful death suit. These payments are often structured to mimic the payments a person would receive from a job.
In the financial world, deferred means that something will happen later; often, this is some sort of payment. That doesn’t mean nothing happens between now and then—often money moves around and interest accumulates in the interim. It is just that the deferred payments into the system or from the system won’t start until that time.
Deferred financial systems can work both ways. A deferred annuity is a system that pays out; at a specific time in the future, the annuity will begin to pay the investor an amount of money. Loans may be deferred in the other direction. A deferred loan doesn’t require any payments until a later time, but interest will typically continue to accumulate.
Finally, the fixed aspect of the annuity designates the way the money will be used. A fixed deferred annuity accumulates interest, and that is all. The amount of interest and when it is compounded combined with an investor’s schedule of payments means that the holder and the investor know the exact value of the annuity at any given time. This type of annuity is considered very safe and has a guaranteed payout.
The fixed deferred annuity is the opposite of the variable deferred annuity. In this system, the money in the annuity is invested on behalf of the annuity holder. This means that there is never a time when all parties know exactly how much the annuity is worth until investments stop and payouts begin. A variable annuity may pay out significantly more money in the long run, but it may lose money as well.