Deferred income annuity (longevity annuity)
An annuity bought today that starts paying only at an advanced age, often 80 or 85: it isolates the tail of longevity risk for far less capital than an immediate annuity would require.
A deferred income annuity separates two problems that an immediate annuity bundles together: funding the first years of retirement and protecting against living to a very old age. The saver pays a single premium around age 65, and the insurer starts paying only at a distant date, for example at 85, then for life. Because some buyers die before payments begin and receive nothing (unless a return-of-premium option was chosen), pooling funds a high income for a modest premium. The insurer carries risk concentrated at the oldest ages, where mortality tables are least reliable and where an error in the mortality trend costs the most. For the saver, the product turns an unbounded uncertainty, the length of life, into a known cost and leaves the rest of the savings free for the first twenty years.
On July 1, 2014, the US Treasury issued its final rule on qualifying longevity annuity contracts (QLACs): a 401(k) or IRA holder could put the lesser of 25% of the account or $125,000 into one, excluded from required minimum distribution calculations, provided payments start no later than the month after the holder turns 85. The SECURE 2.0 Act of December 2022 removed the 25% limit and raised the cap to $200,000, indexed to inflation ($210,000 in 2025).
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