Annuities are flexible insurance contracts designed to provide income to the annuitant and help them achieve long-term savings goals. As opposed to fixed annuities that that make payments in fixed amounts or in amounts that increase by a fixed percentage, variable annuities pay amounts that vary according to the investment performance of a specified set of investments.
Whether fixed or variable, annuities tend to have one thing in common; they have an accumulation stage, and a payout stage. During the accumulation stage, a variable annuitant is expected to make payments at variable interest rates that fluctuate based on the value of the investment sub-accounts.
Getting a tax deferred variable annuity is a useful way of compounding annuity returns. Studies have shown that getting a variable annuity tax-deferred- that is taxing the annuity just once, usually at the payout stage, will yield more returns that if the money was put in a savings account for example.
John Doe gets a bonus from his company to the tune of $10,000. He is in the % tax bracket, and he decides to place his bonus in a savings account at a 0.6% rate of interest, for a seven year period. His interest returns are taxed at the end of every year.
| Starting | Interest | Taxes | Year End | |
| Year 1 | 10,000 | 300 | 90 | 10,210 |
| Year 2 | 10,210 | 306.30 | 91.89 | 10,425 |
| Year 3 | 10,425 | 312.75 | 93.83 | 10,644 |
| Year 4 | 10,644 | 319.32 | 95.8 | 10,868 |
| Year 5 | 10,868 | 326.04 | 97.81 | 11,096 |
At the end of five years, John Doe would have realized only $1,096 on his savings account investment of $10,000. He has paid $469.33 in taxes.
Let us see the scenario if he had out the $10,000 in a variable annuity and had it tax-deferred, with the same interest rate.
| Starting | Interest | Taxes | Year End | |
| Year 1 | 10,000 | 300 | - | 10,300 |
| Year 2 | 10,300 | 309 | - | 10,609 |
| Year 3 | 10,609 | 318.27 | - | 10,927.27 |
| Year 4 | 10,927.27 | 327.81 | - | 11,255.08 |
| Year 5 | 11,255.08 | 337.65 | - | 11,592.73 |
Tax payable on interest (total interest = $1,592.73) = $477.82; total amount received would be $11,114.91.
So a tax-deferred variable annuity will yield more over a savings account investment. The examples above are hypothetical, but the difference will become a lot more noticeable when an annuity is held for 20 years and the interest rate returns are much higher.
Tax-deferred variable annuities have the potential to give better yields when properly applied. However, it is not just an open and shut system. Annuitants must seek professional advice and do their due diligence before signing up for an annuity policy.