Single Premium Immediate Annuity SPIA: Pros & Cons

A term immediate annuity can make sense if you only need income for a set period of time. With an immediate annuity, you pay the insurer a lump sum and start collecting regular payments right away. Some older adults, for example, may choose to put some of their nest egg into an annuity once they hit retirement to ensure a regular income stream. The fees for income annuities are embedded in the payouts, and the safety comes at a cost because you can’t access your principal in a lump sum after you hand it over to the insurance company. Because you can only access that money as a lifetime income stream and don’t have the flexibility to take extra withdrawals, be careful before tying up too much of your savings in an income annuity. It’s important to keep other money accessible for emergencies and other expenses.

The premium is invested by the insurance company into an investment vehicle that contains stocks, bonds, and other securities, which is the annuity fund. Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. As mentioned above, annuities can be created so that payments continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. A GLWB annuity can give you more flexibility when you start taking income, including access to the account if your situation changes.

Pros and Cons of Immediate Annuities

Purchasing a SPIA is a trade-off; you’re giving up the liquidity of your savings for a guaranteed income stream you won’t outlive. If securing lifetime income is your top priority, then an immediate annuity could be worth losing access to those savings as a whole. A SPIA is a contract between you and an insurance company designed for income purposes only. Unlike a deferred annuity, an immediate annuity skips the accumulation phase and begins paying out income either immediately or within a year after you have purchased it with a single, lump-sum payment.

SPIAs are also called immediate payment annuities, income annuities and immediate annuities. If the policyholder dies prematurely, the insurer pays out the death benefit at a net loss to the company. Actuarial science and claims experience allow these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit. In many cases, the cash value inside of permanent life insurance policies can be exchanged via a 1035 exchange for an annuity product without any tax implications. Individuals who invest in annuities cannot outlive their income stream, which hedges longevity risk. So long as the purchaser understands that they are trading a liquid lump sum for a guaranteed series of cash flows, the product is appropriate.

Annuity payout options

This allows them to function as hybrid fixed-variable annuities. Contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value. Finally, you can consider a guaranteed lifetime withdrawal benefit annuity (GLWB). This is an additional feature, called a rider, on either a fixed or variable annuity (based on the underlying investment within the annuity).

Your withholding strategy should depend on your overall income and tax bracket at that time. Taxpayers use 1099-R forms to report distributions from retirement savings products including annuities, retirement plans and pensions. If you’ve received a distribution of $10 or more from any of the retirement income sources, also known as payers, you must file a 1099-R form when you file your taxes.

Your return is based on the performance of a basket of stock and bond products, called subaccounts, that you select. There’s a bigger opportunity for growth compared with a fixed annuity, but there’s also more risk. However, the insurer may allow you to purchase a rider that offers a guaranteed minimum withdrawal, even when the market does poorly. You can then withdraw up to 5 percent of that amount each year for your lifetime — no matter what actually happens to the investments. But if you take all of your money out of a variable annuity with income guarantees, you’ll only receive the actual investment value, not the higher benefit base from the guarantee. With a fixed annuity, the insurance company guarantees the buyer a specific payment at some future date—which might be decades in the future or, in the case of an immediate annuity, right away.

How Are Qualified Annuities Taxed?

Keep in mind that SPIAs are annuitized immediately, which means your premium is instantly converted to a stream of regular payments. If that is not your goal — for instance, if you have another form of retirement income or you would prefer to have a lump of cash accessible for specific reasons — a SPIA is not the right product for you. Individuals approaching retirement age may choose this type of annuity because they will be able to make large contributions without the limitations of 401(k) plans, IRAs and other popular retirement plans. SPIAs allow seniors to supplement Social Security income and pension plans, which might not provide enough to cover retirement living expenses.

In addition, you also have the option of adding a certain period of time to an immediate annuity. This guarantees that payments will last for your lifetime or the certain period (e.g. 20 years), whichever is longer. On some products, you may have options for a cost-of-living adjustment (to protect against inflation) and a liquidity feature (to allow lump-sum withdrawals in the event of a financial emergency). Keep in mind that not all annuity providers may offer these features.

Variable Annuities

Before signing a contract, make sure you understand both the pros and cons. Having some guaranteed retirement income is particularly attractive in today’s world of financial uncertainty. If you know you have a check coming every month for the rest of your life, you can worry less about stock market volatility or outliving your savings. You may also have some regular income from Social Security but it may fall short of covering your bills. If you aren’t lucky enough to have a pension, you may be considering an annuity to boost your guaranteed income.

If you don’t need income right away, you might choose to build your savings through a deferred annuity, which you then convert into an immediate annuity when you’re ready to retire. There is almost no end to the bells and whistles and levers and switches. So I wouldn’t buy even the simplest one without reading the contract three times and hiring someone for a second opinion about whether an annuity really fits my overall financial strategy. The last type of annuity is the equity indexed annuity, which is the type that the salesman I met a few weeks ago was selling at a steak dinner he held for people contemplating retirement strategies. Paycheck annuities are the simplest annuities, and they are kind of like a pension.

In fact, employees retiring can roll their 401(k) plans into a SPIA to create meaningful income over retirement. As such, these financial products are appropriate for investors, who are referred to as annuitants, who want stable, guaranteed retirement income. Because invested cash is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs to use this financial product. All the new-issue brokered CDs Fidelity offers are FDIC insured. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value.

Immediate annuities differ from deferred annuities, which hold on to and invest your money in much the same way, but may be less strict with how you can use and access funds. Most deferred versions allow you to withdraw funds any time you like, transfer your assets, or cash out (though you may face tax consequences when doing so). This chart demonstrates payout rates and rates of return for a $100K SPIA purchased in January 2021. The last three columns indicate the return on the SPIA as an investment.

We solve for that contractually with a single premium, immediate annuity. By the way, he’s a better investor because he didn’t have to worry about that income floor. After all, it’s contractually guaranteed with a Single Premium Immediate Annuity. He got to have his cake and eat it too, because he stayed in the market investing. If you add that type of increase to the income stream, they will significantly lower the payment.

They may also be referred to as single premium immediate annuities. This income guarantee makes annuities an attractive option for some retirement investors, but it comes with its own costs. There are fees to watch out for, and once you’ve purchased an annuity contract it can be expensive to withdraw your principal investment.

Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies. John Egan is a freelance writer, editor and content marketing strategist in Austin, Texas. His work has been published by Experian, CreditCards.com, Bankrate, SHRM.org, National Real Estate Investor, U.S. News & World Report, Urban Land magazine and other outlets. John earned a bachelor’s degree in journalism from the University of Kansas and a master’s degree in communication from Southern New Hampshire University. Diversification and asset allocation do not ensure a profit or guarantee against loss.

• SPIAs allow seniors to supplement Social Security income and pension plans, which might not provide enough to cover retirement living expenses.
• Fees are based on terms that may be defined differently from company to company.
• The typical cost of annual expenses on an annuity—and it can go even higher.
• Your remaining assets are then invested in growth-oriented securities such as stock mutual funds or exchange-traded funds (ETFs).

And much like a 401(k) or an IRA, the annuity continues to accumulate earnings tax-free until the money is withdrawn. Over time, that could build up into a substantial sum and result in larger payments. In annuity jargon, this is known as the accumulation phase or accumulation period. Western & Southern Financial Group, which specializes in life insurance and annuities, recommends Immediate Annuities Explained investigating a deferred annuity if you’ve maxed out contributions to a retirement plan like a 401(k) or IRA. With an immediate annuity—typically funded with one lump-sum payment—you start receiving income payments within 12 months of purchasing an annuity contract. In most instances, immediate annuity payments are sent to you starting one month after you buy your annuity.

Retirement planning should also include addressing your income needs during your retirement years. Your retirement income plan should include covering basic expenses (e.g. housing, utilities, food, insurance). It should also provide income for doing things you enjoy (e.g. travel, buying a new boat). An immediate annuity is a financial tool that is designed to help you create guaranteed lifetime income. Annuity rates offered for immediate annuities will vary based upon age, gender and the type of payout stream selected. Keep in mind, when you receive an immediate annuity quote, the figures will express how much income you will receive over the chosen time frame or period, not the underlying rate of return your investment will earn.

Not only is your gain usually just a percentage of the actual gain, the overall amount you get in any year might be subject to a cap and additional costs. Deferred income annuities, also known as longevity insurance, work similarly, but the checks don’t start coming right away. The longer you wait to receive payments — you buy at 65 but don’t start collecting checks until 85, for example — the bigger the checks will be. An immediate income annuity generally starts sending checks very soon, and they keep coming until you die. For some people, especially those uncomfortable with managing an investment portfolio, a retirement annuity can be a secure way to make sure they don’t outlive their assets.

A deferred annuity is funded with a lump sum or payments over time (called an accumulation period). An immediate annuity starts paying when you deposit a lump sum or in the first 12 months following its purchase. But on the same note, if the investments perform poorly, your payments may decrease, like regular investment accounts.