Deferred Income Annuity: Your Essential Guide for Retirement

A deferred income annuity (DIA), also known as a longevity annuity, is an insurance product that provides a steady income stream starting at a future date. DIAs can grow your money, and the regular income they offer provides financial stability during retirement.

Retirement planning can be overwhelming. It’s challenging to plan when the future is uncertain and there are so many financial products available.

DIAs can help simplify your planning because they provide you with a guaranteed stream of income. In this article, you’ll learn what a DIA is, how it works, and whether it might be a good choice for you.

What is a DIA?

A deferred income annuity (DIA) is a specific type of annuity contract. Like other annuities, you buy a DIA from an insurance or annuity company. First, you fund your annuity by paying a premium — either in a single lump sum or as a series of payments over time. In return, the insurer commits to paying your money back to you in a reliable stream of income.

With DIA annuities, you choose the date when you’ll start receiving income when you buy. You can typically select a date between two and 10 years in the future. On that date, your product “annuitizes” and converts into regular income payments.

In the meantime, the annuity begins to generate interest. The longer the period you choose, the more interest you earn and the higher your income payments.

Note: Like other annuities, your DIA can be either qualified or non-qualified. A qualified DIA is a qualified longevity annuity contract (QLAC).

How Does a DIA Work?

DIAs are fairly straightforward.

First, you fund your annuity with a premium payment. It can be a one-time payment or a series of payments over time. While you’re buying the annuity, you specify a time in the future when you want to annuitize and have your retirement payments start.

That starts the accumulation period. The accumulation period is when your annuity earns interest and grows.

Eventually, the date you chose will arrive, and the accumulation period will end. The company will begin to pay you a steady income. Depending on the payout option you choose, the payments could last a certain amount of time or for the rest of your life.

DIAs only offer static monthly payments. If you want an annuity that adjusts payouts based on stock market returns, this is not the annuity for you.

DIA vs. Other Kinds of Annuities

DIAs are sometimes confused with other types of annuities. Here is how they compare and contrast to other common annuity types.

DIA vs. Immediate Annuities

Immediate annuities and DIA annuities both offer guaranteed retirement income. The difference is when they start to pay you that income.

Immediate annuities begin to pay you back shortly after the initial premium payment — typically within a year.

In contrast, DIAs defer payments to a future date, anywhere from two years to a decade after you buy them. That means your money has more time to grow and can generate larger payments overall.

DIA vs. Variable Annuities

Variable annuities are a type of deferred annuity. When you buy a variable annuity, you choose a set of investments. Your interest crediting rate varies depending on how those investments perform.

While this can mean potentially higher returns, it also carries the risk of lower or even negative returns.

In contrast, DIAs provide a guaranteed income stream after the deferral period, offering more predictability and security.

DIA vs. Indexed Annuities

Fixed-indexed annuities offer returns based on a specific market index. They provide a potential for growth while having some level of protection against market downturns. Like variable annuities, they offer potentially higher interest rates than DIAs, but they also come with higher risk.

DIA annuities don't provide direct exposure to market upsides, but they do promise a certain income payment value after the deferral period. That gives you stability and the ability to plan your income.

DIA vs. Fixed Annuities

DIAs and fixed annuities are similar. They both grow your money safely at a guaranteed fixed minimum rate of interest.

However, with fixed annuities, you don’t choose an annuitization date when you buy it. At the end of your annuity term, you get a choice: You can annuitize, you can transfer your money over into a new annuity, or you can simply withdraw your money.

With a DIA, you don’t get the choice. The annuity will annuitize on the date you choose when you buy it. That makes them much less flexible than fixed annuities.

DIA Pros

DIAs have some advantages that make them great options in certain financial circumstances. Here are some of the benefits of DIAs.

Guaranteed Income for Life

One of the primary benefits of a DIA is the promise of regular payments throughout your lifetime, regardless of how long you live. It can create a sense of stability in your golden years and protect you against the risk of outliving your savings.

Income Planning

Deferred income annuities give you certainty about when you’ll start to receive your income. You can control your income start date, which lets you align your income with your anticipated retirement date or other financial milestones.

Steady Returns

DIAs give you a way to grow your retirement savings. They offer you a steady interest rate. And the longer you defer your income, the more time your investment has to grow.

Tax Advantages

Like all annuities, DIAs offer some tax benefits.

For example, annuity income is tax-deferred, meaning that you pay taxes on it when you receive your income rather than in the year you earn it. Also, since your income in retirement is typically lower, you usually have a lower marginal tax rate, meaning you typically pay relatively low taxes on those earnings overall.

See the annuity taxation guide for more information on how taxes work for annuities.

DIA Annuity Cons

While deferred income annuities offer several benefits, they also come with certain limitations.

Inaccessibility of Funds

Once you've invested your money into a DIA, it is generally not accessible until the income payments start.

That’s different from fixed annuities. With fixed annuities, you can usually take out your money if you need to (although you may have to pay surrender charges on early withdrawals).

This lack of liquidity means you won't be able to tap into these funds for unexpected expenses or emergencies. This is something to consider when deciding how much money to invest in a DIA. Make sure you only invest money that you feel confident you won’t need in the short term.

High Fees and Costs

DIAs can sometimes be associated with higher costs and fees compared to other retirement investment products. These fees may include commission charges, administrative fees, surrender charges, and mortality and expense risk charges. It's crucial to understand all the costs associated with a DIA before making your investment.

Note: Canvas Annuity offers great annuity rates with zero commissions, account charges, or fees.

You Must Annuitize

You must annuitize a DIA. When you buy it, you agree that your money will stay in your annuity account until the day you choose to convert it into a stream of income.

There’s no flexibility.

While it gives you a steady income stream during retirement, it also requires you to give up control over that portion of your retirement savings.

Other annuities, like fixed annuity products, give you the option to annuitize but also let you simply withdraw your money if you want to.

Who is a DIA Right For?

A deferred income annuity can be an attractive option for the right person, but it’s not for everyone. DIAs are best suited to the following types of people:

Longevity planners. If you're worried about outliving your savings and having a reliable income stream well into your golden years, a DIA could be a good fit. With a DIA, your income continues for life, providing peace of mind that you won't run out of money.

Those who know when they want their income. If you want to decide exactly when your income starts, DIAs are great. You specify the date you’ll receive your income when you buy them.

Risk-averse investors. DIAs provide guaranteed income. That makes them a good choice for people who prefer to avoid the volatility of the stock market or other riskier investments.

People with good health and longevity in the family. If you're in good health and have a family history of longevity, a DIA could offer greater returns over your lifetime.

On the other hand, individuals who might need access to their funds before the annuitization date, those who are concerned about high fees, or who prefer more control over their investments may find a fixed annuity a better option.

Fixed annuities provide many of the same benefits — including a lifetime income — but offer more flexibility.

If you’re not sure which option is best for you, consider consulting a financial planner. They can help give you clarity about your needs and find the best option for you.

Annuities Offer Financial Peace of Mind

Deferred income annuities (DIAs) are designed to help you feel confident going into retirement. Their big benefit is guaranteed income starting at a date in the future that you choose. If you know when you’ll need your income, and you don’t mind sacrificing some flexibility, they’re a good option.

However, like any financial product, DIAs come with some drawbacks. Your money is inaccessible, there can be high fees, and you have to annuitize them.

For anyone who might need to access their money early, a fixed annuity could be a more appropriate solution. Talk to Canvas Annuity’s licensed reps to learn more about how a fixed annuity could help you feel confident going into retirement.