Immediate vs. Deferred Annuities: When to Use Each

The most fundamental question when considering an annuity is whether you need income now or income later. This single question determines whether you should look at an immediate annuity or a deferred annuity. Both types guarantee income backed by the financial strength of an insurance company, but they serve different purposes, work at different stages of retirement planning, and come with different features, costs, and tradeoffs.

This guide explains how each type works, compares the most common varieties (SPIA, MYGA, FIA, and variable deferred annuities), and helps you decide which one fits your retirement timeline. Whether you are already retired and looking for reliable monthly income, or still in your working years and planning ahead, understanding these two categories is the starting point for making a smart annuity decision.

How Immediate Annuities Work

An immediate annuity, most commonly a single premium immediate annuity (SPIA), is the simplest type of annuity. You give an insurance company a lump sum, and the company begins paying you a fixed amount on a regular schedule, usually monthly. Payments typically start within 30 days of purchase and no later than 12 months. Once the payments begin, the amount is locked in and guaranteed for the duration of the contract.

As a general illustration, a 65-year-old who deposits $100,000 into a SPIA might receive approximately $570 per month for life based on current rates. The exact amount depends on the insurance company, current interest rates, the payout option you choose, and your age and gender at the time of purchase. The older you are when you buy a SPIA, the higher your monthly payment, because the insurance company expects to make payments for fewer years.

You can choose from several payout options. A life-only payout provides the highest monthly income but stops when you die, even if that is one year after purchase. A life with period-certain option (such as life with 10-year certain) guarantees payments for your lifetime or a minimum of 10 years, whichever is longer, giving your beneficiaries some protection. A joint-and-survivor option covers two people and continues paying as long as either person is alive, though at a lower monthly amount. A cash refund option guarantees that if you die before receiving total payments equal to your original deposit, the difference goes to your beneficiary.

Immediate annuities generally have no surrender charges and no ongoing fees. The insurance company's profit is built into the payout rate. This simplicity and transparency are major advantages over more complex annuity products. However, the tradeoff is that once you commit your lump sum, you typically cannot access the principal. The money is irrevocably converted into an income stream.

How Deferred Annuities Work

A deferred annuity has two phases: the accumulation phase and the distribution (or income) phase. During the accumulation phase, your money grows tax-deferred inside the contract. During the distribution phase, you begin receiving income, either through annuitization, systematic withdrawals, or an income rider. The accumulation phase can last as long as you want — years or even decades — giving your money time to compound before you need it.

There are three main types of deferred annuities, each with a different approach to growth:

Multi-year guaranteed annuity (MYGA): A MYGA offers a fixed interest rate guaranteed for a set period, typically 3 to 10 years. It works like a certificate of deposit (CD) but with tax-deferred growth. In the current rate environment of 2026, competitive MYGAs are offering rates in the range of 4 to 5 percent or higher for multi-year terms. When the guarantee period ends, you can renew at the current rate, withdraw your money (surrender-free at that point), roll it into a new annuity via a 1035 exchange, or annuitize for income.

Fixed indexed annuity (FIA): An FIA credits interest based on the performance of a market index, such as the S&P 500, subject to a cap rate and a floor. The floor is typically 0 percent, which means your principal is protected from market losses. The cap limits how much you can earn in a given period. For example, if the cap is 8 percent and the index gains 12 percent, you earn 8 percent. If the index drops 15 percent, you earn 0 percent rather than losing money. FIAs are more complex than MYGAs and come with longer surrender periods, typically 6 to 10 years.

Variable deferred annuity: A variable annuity lets you invest in sub-accounts similar to mutual funds. Your returns depend on the performance of the investments you select, which means you can gain or lose money. Variable annuities offer the highest growth potential but also the most risk and typically the highest fees, including mortality and expense charges, fund management fees, and optional rider fees. Because of their investment component, variable annuities are regulated by the SEC as securities. Consult a financial advisor before purchasing a variable annuity.

When to Choose an Immediate Annuity

An immediate annuity is designed for people who need income now. It is the right choice in several specific situations:

• You are already retired and need to convert a lump sum into reliable monthly income to cover essential expenses
• You received a pension buyout or lump-sum distribution and want to recreate a pension-like income stream
• You want to cover the gap between Social Security and your monthly expenses with a guaranteed payment that cannot run out
• You are concerned about market risk and want income certainty regardless of what happens in the stock market
• You want a simple, transparent product with no ongoing fees, no surrender charges, and no investment decisions to make

The biggest consideration with a SPIA is that you are giving up access to the lump sum. Once the money is annuitized, you cannot get it back in most cases. For this reason, most financial advisors recommend using only a portion of your savings for a SPIA — enough to cover essential expenses — and keeping the rest in liquid accounts for flexibility, emergencies, and legacy goals.

When to Choose a Deferred Annuity

A deferred annuity is designed for people who are still in the accumulation phase — saving and growing their money for a future retirement. It is the right choice when:

• You are several years or more away from retirement and want to grow your savings tax-deferred
• You have already maxed out your 401(k) and IRA contributions and want additional tax-deferred savings with no contribution limit
• You want to lock in a guaranteed interest rate (MYGA) or participate in market gains with principal protection (FIA)
• You want the flexibility to decide later whether to annuitize, take systematic withdrawals, or activate an income rider
• You want to maintain access to your principal (within surrender period limits) rather than committing it irrevocably to an income stream

The main tradeoff with deferred annuities is the surrender period. Most deferred annuities restrict your access to funds for 6 to 10 years. If you need to withdraw more than the free withdrawal allowance (typically 10 percent per year) during the surrender period, you will pay surrender charges that can range from 7 percent in the first year to 1 percent in the final year. This makes deferred annuities best suited for money you genuinely will not need for several years.

Costs and Features Compared

The cost structures of immediate and deferred annuities are quite different. Understanding these differences helps you compare products more accurately.

Immediate annuities (SPIAs) have no explicit fees. There are no annual charges, no management fees, and no surrender charges. The insurance company's cost and profit margin are factored into the payout rate itself. What you see is what you get: a guaranteed monthly payment for the duration of the contract.

MYGAs also have no explicit annual fees. The insurance company's margin is built into the interest rate spread. Surrender charges apply during the guarantee period, typically starting at 7 to 8 percent and declining to zero. Most MYGAs allow 10 percent free withdrawals annually.

Fixed indexed annuities (FIAs) may have some internal costs built into the crediting method through caps, spreads, or participation rates, but they typically do not have explicit annual fees unless you add optional riders. An income rider, for example, usually costs 0.75 to 1.25 percent of the income benefit base per year. Surrender periods are longer, typically 8 to 10 years.

Variable deferred annuities have the highest fee burden. Total annual costs can range from 2 to 3.5 percent or more, including mortality and expense charges (typically 1.0 to 1.5 percent), fund management fees (0.5 to 1.0 percent), and optional rider fees (0.5 to 1.5 percent). These fees reduce your net returns every year and are a significant consideration when evaluating whether a variable annuity makes sense for you.

Using Both in Your Retirement Plan

Immediate and deferred annuities are not mutually exclusive. Many retirees use both as part of a comprehensive income plan. A common strategy is to use a deferred annuity during your working years to accumulate savings tax-deferred, then convert a portion of that savings into an immediate annuity at retirement to create a guaranteed income floor.

Another approach is laddering. Instead of putting all your money into a single SPIA at one age and one interest rate, you purchase smaller SPIAs over several years. For example, you might buy $50,000 worth of SPIA at age 65, another $50,000 at age 68, and another $50,000 at age 71. Each purchase locks in the prevailing interest rate at that time and benefits from your older age (which increases the payout rate). This laddering strategy reduces the risk of committing all your money at a single interest rate.

No single annuity type is best for everyone. The right choice depends on your age, when you need income, how much risk you are willing to take, how important liquidity is to you, and how large your overall retirement portfolio is. A financial advisor can help you evaluate the full range of options and build a plan that combines the right products for your specific situation. Consult a financial advisor to determine the best approach for your retirement income needs.

The Bottom Line

Immediate and deferred annuities address two different needs. An immediate annuity converts a lump sum into income that starts right away, giving retirees a simple, guaranteed paycheck for life. A deferred annuity lets you grow your savings tax-deferred during your working years and convert to income later, with multiple options for how your money grows and how you eventually receive it. Both types play a valuable role in retirement planning, and many people benefit from using each one at the appropriate stage of their financial life.