Making sense of 2 types of annuities

My readers seem to be confused about two types of annuities: postponed and deferred. I think the misunderstanding arises because they are using the terms interchangeably. Let me explain the difference, which is a big one.

Postponed annuity
A postponed annuity is one where you retire after meeting the age and service requirements and postpone the receipt of your annuity until a later date.

This option is only available to employees under the Federal Employees Retirement System who have reached their minimum retirement age (MRA) and have at least 10 years of creditable service.

If you retire under the MRA+10 provision, you can avoid the stiff age reduction penalty that goes along with it by postponing the receipt of your annuity to a later date.

If you have fewer than 20 years of service, that penalty is 5 percent for every year (5/12 percent per month) that you are under age 62. If you have at least 20 years of service but fewer than 30, the penalty applies until you reach age 60.

The annuity you eventually receive will be based on your years and full months of service and your high-three salary on the day you retire. It will not be increased by any cost-of-living adjustments that have been given to other retirees since your retirement date. However, once you begin receiving your annuity, you will be treated the same as all other retirees.

If you retire and postpone the receipt of your annuity, you can’t continue your coverage under the Federal Employees’ Group Life Insurance Program. Nor can you continue your coverage under the Federal Employees Health Benefits Program, other than through the Temporary Continuation Provision of law, where you pay the entire premium plus 2 percent.

However, if you were enrolled in FEGLI or FEHBP for the five continuous years before you retired, you may re-enroll in them when your annuity begins. If you re-enroll in FEHBP, you may choose any plan, not necessarily the one in which you were enrolled when you retired. Your FEGLI coverage will be limited to the amount you had when you retired.

Deferred annuity
A deferred annuity is one where you don’t meet the age and service requirements to retire, you have at least five years of creditable service when you leave the federal government, you don’t take a refund of your retirement contributions, and you apply for an annuity when you reach the right age.

If you are a former Civil Service Retirement System employee, the right age is 62. If you are a former FERS employee, you have more options. You can retire at age 62 with at least five years of service, at age 60 if you have at least 20 but fewer than 30 years of service, and at your MRA with 30 years of service.

You may also receive a deferred annuity under the MRA+10 provision, but with the same age reduction penalty mentioned above, unless you postpone the receipt of your annuity to a later date.

Your annuity will be based on your years and full months of service and your high-three salary on the day you left government. No unused sick leave will be added to the calculation of your service time. Nor will your annuity be increased by any COLAs that were given to retirees after you left.

However, once you begin receiving your annuity, you’ll be treated the same as all other retirees.

There are other downsides to a deferred annuity. Even if you were enrolled in FEHBP and FEGLI for five years before you left government, you won’t be able to re-enroll in them when you begin receiving your deferred annuity.

Reg Jones was head of retirement and insurance programs at the Office of Personnel Management. He and Mike Miles, Federal Times Money Matters columnist, answer readers’ questions on the Federal Times Web site. Go to “Ask the Experts” at www.federaltimes.com.