Single Premium Immediate Annuities or SPIA

If you’re looking for a way to supplement your retirement income – or even to create an overall plan because your employer does not offer a pension – a single premium immediate annuity (SPIA) could be a good option. That’s because SPIAs can start paying out a guaranteed income stream immediately after you make your contribution.

Many people refer to these annuities as a personal pension. Before you commit to a SPIA, though, it is important to have a good understanding of how these financial tools work and whether or not this type of annuity is a good fit for your retirement income planning needs.

How Does a SPIA Work?

Like other annuities, a SPIA represents a contract between an individual and an insurance carrier (typically a life insurance company such as MetLife or New York Life Insurance Company). These financial vehicles are designed to generate a regular stream of income right away from the insurance company, or within one year after you have purchased it.

Many retirees use single premium immediate annuities to supplement their retirement income because they know that they can count on the incoming cash flow to arrive for a certain period of time, or even for the remainder of their lifetime.

Options for Funding a SPIA

Single premium immediate annuities are typically funded with one single lump sum of money. These funds may come from personal savings and investments, or by “rolling over” money that is in an IRA (Individual Retirement Account) and/or an employer-sponsored retirement account such as a 401(k).

When you roll funds directly over to the annuity from an IRA or employer-sponsored retirement plan, there are no taxes due. Rather, your income payments will be taxed either in part or in full, based on the type of SPIA (qualified or non-qualified) that you have.

Single Premium Immediate Annuity Interest Rates

You can choose from several different interest rates or earnings adjustments when you purchase a SPIA. These can be fixed, tracked to the performance of an underlying investment, or adjusted annually for inflation. The fixed annuity rates are set by the offering life insurance company.

When you choose a SPIA, it is important to consider several factors, such as your risk tolerance, age, anticipated retirement income needs, and your intended date of retirement. You should also research the insurance company that is offering the annuity. Doing so will help you to narrow down which type of single premium immediate annuity – if any – is best for you.

Guaranteed Income Payout Options

Most insurance companies offer different types of immediate annuities, so you can “customize” them to best fit with your specific pay objectives. For instance, you can typically choose to receive income on a monthly, quarterly, semi-annual, or annual basis.

These payments will continue for a time period that you specify, such as for 10 or 20 years. If the income recipient (i.e., annuitant) dies before this time frame ends, the income from the annuity can continue to be paid out to one or more named beneficiaries.

Alternatively, you may choose to keep the income payments arriving for the remainder of your lifetime – regardless of how long you live. This can help to reduce the worry about running out of income in the future.

You may also be able to add a joint income recipient, such as your spouse or partner, to a SPIA. This means that income will continue until the death of the second individual. Following the first person’s death, the dollar amount of the income could stay the same or be reduced.

If you are concerned about the income payments from a SPIA not keeping up with future purchasing power, you may be able to add a cost-of-living adjustment (COLA) rider. While this rider could require you to pay an additional amount of premium, it may be well worth it – especially if you live a long life and want to ensure that your income keeps pace with the rising cost of goods and services you need.

If the annuitant (i.e., income recipient) dies before receiving all of his or her contributions back from a SPIA, a death benefit may be paid to one or more beneficiaries. Depending on the annuity, though, it is possible that the insurance carrier will retain these funds. So, before committing to a SPIA, it is essential to know what will happen with your contribution to this situation.

Qualified versus Non-Qualified SPIAs

Single premium immediate annuities can be either qualified or non-qualified. This refers to the type of funds that are contributed to it. As an example, a non-qualified immediate annuity is funded with after-tax dollars. This means that you have already paid taxes on these funds.

With a non-qualified SPIA, the income payments will contain a portion that is considered a tax-free return of premium, and another portion that is considered a taxable gain. The percentage of each payment that is non-taxable is referred to as the exclusion ratio. Once all of the contributions has been paid out, the remainder of the payments will be 100% taxable at your then-current income tax rate. (This may include both federal and state income tax).

A qualified SPIA is funded with pre-tax dollars. For instance, if you roll over money from a traditional IRA or retirement plan, these funds have not likely been taxed. That’s because these types of plans allow for pre-tax contributions. Therefore, 100% of the income payments from a qualified single premium immediate annuity will be taxed as ordinary income when they are received.

Single Premium Immediate Annuity Pros and Cons

There are both advantages and drawbacks with single premium immediate annuities the same with single premium life insurance. So, it is important to understand all of these so that you know what to anticipate with the SPIA product going forward. You should also review the insurance company that is offering the annuity to make sure that it has a good reputation.

Some of the biggest advantages with SPIAs include:

Regular guaranteed income payments (possibly even for the rest of your life)
Income payments that begin right away (versus at some point in the future)
No or low fees
Increasing income over time to help keep pace with inflation (with a COLA rider)
Death benefit coverage option
Protection from creditors (depending on your state of residence)

There are also some potential drawbacks to consider with a single premium immediate annuity, such as:

Annuitization (i.e., converting the annuity contract to an income stream) is a non-reversible decision
Market risk (with variable SPIAs)
Loss of purchasing power over time (if a cost-of-living adjustment is not included)

Is a SPIA Right for You?

SPIAs can offer a long list of benefits. But even so, these financial tools are not right for everyone. With that in mind, some items to consider before you commit to purchasing a single premium immediate annuity should include the following:

Your age today (or at the time you buy the annuity)
Marital status (for joint income needs)
Other retirement income sources (such as Social Security and interest from your savings)
Any possible income “gaps” between leaving your employer and filing for Social Security benefits
Estimated future income need
Life expectancy
Percentage of your retirement savings / portfolio to use for income purposes
What you plan to do with the remaining assets in your portfolio
Risk tolerance
The desire to get fixed (guaranteed) or indexed payment
Whether you want income to last for a set number of years (i.e., period certain) or for the payment to continue for the remainder of your lifetime
The estimated period of time until retirement
The need for inflation protection with the annuity payment
Where your lump-sum contribution will come from (as in qualified or non-qualified funds)
Any other financial need with the annuity contract, such as death benefit coverage
Financial strength ratings of the insurance company (from Standard & Poor’s, A.M. Best, Moody’s, and/or Fitch)

Are You Ready to Compare Single Premium Immediate Annuity Quotes?

A SPIA can provide you with guaranteed income security for life – starting today. Just like purchasing any other “high ticket” item, though, it is recommended that you compare several single premium immediate annuities (SPIAs) before you commit to purchase one.

This is because there are many different types of annuities and SPIA contracts, and they are not all exactly the same. Also, once the annuity is converted to an income stream, the decision is irreversible and you can no longer get your lump sum of money back. So it is essential that you know how – and how well – an SPIA will fit in with the rest of your portfolio.

Working with an independent insurance advisor specialist when you buy an annuity can help you with deciding whether or not an SPIA is a good option, given your short- and long-term financial needs. So, if you have more questions about annuities or you would like to get an SPIA quote, give Insurance Geek a call or check out our website.

We are an independent insurance and annuity advisory firm, and we’re affiliated with more than 40 of the top-rated life insurance companies in the marketplace. We can be reached by phone at <phone number> or online by going to <email address>. So, contact us today. We look forward to helping you secure your retirement income.