Overview: How quickly an annuity begins paying out is the defining difference between immediate and deferred annuities. Understanding when each is appropriate is a core exam competency.

Immediate Annuities

An immediate annuity — almost always purchased with a single premium — begins making payments within 12 months of purchase, typically within 30 days. Because there is no accumulation phase, the premium is immediately converted into an income stream.

Immediate annuities are appropriate when a client is already retired and needs income now. A retiree with a gap between Social Security and monthly expenses is a classic candidate. A 65-year-old with $300,000 in a rollover IRA, facing a $1,500-per-month income shortfall, could purchase a single-premium immediate annuity that begins covering that gap next month — using the insurance company's pooled longevity risk to generate a payment rate far higher than any savings account or CD can safely produce.

The key trade-off is liquidity: once the premium is paid, the principal is typically gone. The client trades access to a lump sum for a guaranteed income stream.

Deferred Annuities

A deferred annuity has two phases: the accumulation phase, during which premiums are paid and grow tax-deferred, and the payout (or distribution) phase, which begins at a future date the owner selects.

During the accumulation phase, the annuity grows without current income taxation. No taxes are owed on interest, dividends, or capital gains while they remain inside the contract — a "triple compounding" benefit where the owner earns returns on their principal, on their accumulated gains, and on the money that would otherwise have gone to taxes. The payout phase may begin years or decades later.

Deferred annuities are appropriate when a client wants to accumulate retirement assets systematically, supplement maxed-out 401(k)s and IRAs (non-qualified deferred annuities have no IRS contribution limits), or create a guaranteed future income stream starting at a specific date.

Choosing Between Immediate and Deferred

The practical decision rule: choose an immediate annuity when income is needed now; choose a deferred annuity when income is needed later and growing assets in the meantime is a priority.

A pre-retiree at age 55 who plans to retire at 67 has 12 years to let a deferred annuity grow. A 68-year-old who retired last month and needs to fill an income gap immediately has no use for an accumulation phase. The timing of the income need drives the choice.