deferred annuity
/ DIA = "D-I-A" /
Suppose you are 50 and worried about outliving your money, but you do not need income yet — you are still working. You would like to set aside some money now so that a guaranteed income switches on later, when you actually retire. A deferred annuity does this: payments do not begin immediately but at a future date you choose, after a deferral period.
Mechanically there are two phases. During the accumulation (deferral) phase you pay in — either a single premium or a series of contributions — and the money grows. Then in the payout phase, starting at the agreed age, you receive income (often for life). Because payments are postponed and because some buyers die before they ever start collecting, the cost per dollar of future income is much lower than for an immediate annuity. A striking version is the longevity annuity: at 60 you pay, say, 50,000 for income that only begins at 85 — cheap precisely because many will not reach 85.
In actuarial terms the price is the actuarial present value of a life annuity deferred by n years, written n-deferred a_x, which discounts both for interest and for the chance of surviving to the start date. Deferred annuities matter as a flexible retirement-saving and longevity-hedging tool. The honest caveat: in the deferral phase your money is typically locked up and, for a pure longevity annuity, if you die before payments begin you (or your heirs) may get nothing back unless you bought a return-of-premium feature.
At 60, Sam pays 50,000 for a longevity annuity that pays 1,800 a month for life starting at age 85. Because only a fraction of 60-year-olds reach 85, the insurer can offer a large income for a modest premium. Sam treats it as cheap insurance against the 'tail' scenario of a very long life; he plans his other savings to cover ages 60 to 85.
Pay now, income starts later — the longer the deferral, the cheaper the lifelong income.
Do not confuse a deferred income annuity (which buys future lifelong income) with a deferred annuity used purely as a tax-deferred savings account. The same word covers both; only the income version directly hedges longevity.