Deferred Annuity: Buy Now, Get Paid Later — LLQP Definition
A deferred annuity is an annuity where income payments don't start right away — they begin at a future date chosen at purchase, often years later at retirement.
Between purchase and payout sits the accumulation phase: your premium grows inside the contract. Then comes the payout (annuitization) phase: the insurer converts the accumulated value into a stream of payments, typically for life. Contrast this with an immediate annuity, where payments start within one payment period (about a month) of a single lump-sum deposit.
Why it matters on the LLQP exam
Deferred annuities are where the exam tests the big picture of retirement planning:
- Who uses them — someone in their working years who wants to lock in future guaranteed income, or a client parking registered money (RRSP) that must be converted to income by the end of the year they turn 71.
- Funding style — single premium deferred annuity (SPDA) or flexible/periodic premiums over time.
- Surrender values — during accumulation the contract usually has a cash value, but early withdrawal can trigger surrender charges. Once annuitized, the decision is generally irrevocable — you can't get your capital back. The exam loves that word.
Tax treatment is a favourite trap: growth inside a non-registered deferred annuity is not taxed annually, but at payout each payment has a taxable interest portion. With registered funds, the entire payment is taxable income.
Watch for questions contrasting a deferred annuity with an RRIF — both draw income later, but only the annuity guarantees payments for life.
Example question
A client buys an annuity at age 55 with payments beginning at age 65. This is best described as:
- An immediate annuity
- A deferred annuity
- A term certain annuity
- A variable annuity
Answer: B — a gap between purchase and the first payment defines a deferred annuity.
Round this out with the life annuity and joint life annuity, and review the segregated funds hub.