Which are the two classifications of annuities based on when payments begin?

Annuities are financial products designed to provide a stream of income, typically for retirement. They can be classified based on the timing of when the payments begin, which is a fundamental characteristic that affects the way annuities are used.

The classification of immediate and deferred annuities is crucial. An immediate annuity starts making payments to the annuitant shortly after a lump-sum payment is made, offering a fast source of income. This is often chosen by individuals who are nearing or in retirement and need immediate cash flow.

On the other hand, a deferred annuity allows for the accumulation of funds over a specific period before the annuitant begins receiving payments. This option is ideal for those looking to save for retirement and can allow for tax-deferred growth of the investment until withdrawals are made.

Understanding these classifications helps consumers decide which type fits their financial goals and needs, especially in planning for retirement income.