A single premium immediate annuity (SPIA) is one of the simplest types of annuity contracts. With a SPIA, you make a single large deposit with an annuity company and your monthly payments begin immediately. While SPIAs are easy to understand, buying them requires some foresight. You purchase a SPIA with a single lump sum, instead of making incremental payments over time as with some other types of annuities.
What Is a Single Premium Immediate Annuity?
A single premium immediate annuity is an annuity purchased with one large upfront payment. The SPIA immediately begins paying you back your purchase price plus a modest interest rate in installments.
“SPIAs by definition are purchased at one time with one payment,” says Sri Reddy, senior vice president of Retirement and Income Solutions at Principal Financial Group. “A SPIA annuity provides regular payments over a period of time, typically lasting throughout the lifetime of the one receiving the payments, much like a pension or Social Security.”
While they are the oldest type of annuity, with a storied history reaching back to the Roman Empire, only about 10% of annuities purhased today are SPIAs. Deferred annuities, which provide a longer contribution window and significantly more time for investment growth, have become increasingly popular.
“Many annuity products, like variable annuities or fixed annuities, are commonly used for accumulation purposes as they can earn interest,” said Adam Deady, a certified financial planner (CFP) with MassMutual. “A SPIA is strictly built for income.”
That means you’ll generally see lower growth of your investment with SPIAs than other types of annuities that build value for years or decades before your first withdrawal.
SPIA payments generally start immediately when you purchase your annuity. But how you would answer the following three questions determines how large those payments may be:
For how long would you need to receive payments? You can opt to schedule payments over a set period of time, like monthly payments for 20 years. Or you can have payments guaranteed for the rest of your life. The time period you select determines the size of your payment. Generally speaking, the longer the time period, the lower the monthly payout.
Would you like your payments to keep up with inflation? If you opt for an inflation rider to help maintain your purchasing power, you’ll generally have to pay a fee as well as start off with smaller annuity payments, giving your annuity balance extra time to grow.
How would you like your SPIA rate of return calculated? Depending on your annuity company, you may be able to choose a fixed or variable rate based on market conditions. Basing SPIA returns on the market means you take on a bit more risk. In bad years, your payments could drop—but in good years, you could receive more income than you would with a fixed rate.
- Easy to understand. SPIAs are less complicated than some other annuity products. You tell the annuity company how much you want to deposit and the company tells you how much income you’ll receive. You generally don’t have to make any investment decisions and there’s less uncertainty over what your future payments will look like.
- Guaranteed long-term payments. “One of the greatest fears for retirees is running out of money, and this fear is rooted in not being able to control or predict market volatility, healthcare costs, inflation and how long you live,” says Reddy. With a SPIA, you can create a stream of guaranteed income that won’t run out.
- Income payments generally do not fluctuate based on the market. If you use a SPIA with a fixed interest rate, your future income is not based on the market. This means that you don’t have to worry about your retirement income falling due to economic downswings.
- Higher return from mortality credits. An annuity combines your deposit into a large pool with many other customers’ money. When a client passes away earlier than expected, part of their deposit goes to the surviving annuity customers through a payment known as a mortality credit. If you live a very long life, these credits increase your overall payout. Mortality credits are another advantage annuities offer that investing on your own doesn’t.
- Lower annuity fees. SPIAs have fewer fees than other annuities due to their simplicity. You avoid some of the account management and investment fees seen on deferred annuities. As a result, more of your deposit goes to your retirement income.
- Some inflation protection. By adding a cost of living adjustment (COLA) rider, you can have your SPIA income payments increase over time. This helps your retirement income keep up with inflation. Keep in mind, though, with a COLA rider, your first annuity payments will be lower than comparable payments from policies without COLA riders to provide room for a lifetime of inflation adjustments.
- Lower liquidity. When you purchase an annuity, you generally lock away that money for the immediate future. “The purchase and income option are irrevocable decisions and you do not have access to the purchase payment for lump sum withdrawals,” Deady says. If you sign up for a SPIA, make sure that you won’t suddenly need that money in the short-term because it won’t be available—at least without a sizable penalty.
- Large upfront cost. Since you’re buying a SPIA with just one deposit, you need to save up a large amount of money before you can purchase one of these contracts. If you don’t have the money now, you could save up first through a deferred annuity and then transfer the balance into a SPIA later.
- Inflation risk. A period of high inflation could reduce your long-term purchasing power from a SPIA. While adding an inflation rider can help, you still don’t get the same long-term potential growth as you would from market assets.
- Smaller inheritance. Moving your money in a SPIA could reduce the potential inheritance for your heirs, depending on how you set up the contract. If you set up a SPIA for your life only, it will not pay anything more after you pass away. Alternatively, you may buy a contract guaranteeing a minimum number of monthly payments or you can purchase a death benefit rider to make sure that some amount goes to your heirs. Either of these moves, however, will lower your monthly annuity income.
- Market risk with variable SPIAs. If you sign up for a variable SPIA, your payments depend on the market. While this can help protect you from large increases in inflation, there’s also a chance your retirement income could fall in years where the investments don’t do well.
Should You Choose a SPIA?
A SPIA works well for people who need money now and value certainty with their investments. This may make them especially good fits for those in retirement who cannot take as many risks.
“SPIAs are good for anyone who has non-discretionary expenses that aren’t covered by reliable sources of income,” Reddy notes. For example, if you don’t have a pension, a SPIA could serve the same role. “We believe that monthly income used to cover ‘essential’ monthly expenses should be guaranteed and not subject to market risk,” he says. A SPIA can provide that kind of security, and life-time SPIAs ensure you won’t outlive your retirement funds.
On the other hand, if your goal is to grow your savings and you don’t need income right now, you may be better off with a deferred annuity with more growth potential, like a variable or fixed index annuity, or direct investments in the stock market.
Even during retirement, you may want to keep at least some of your savings in assets like stocks or mutual funds versus putting everything in an annuity. This way you put some of your portfolio toward growth to help offset inflation while you use the guaranteed income of an annuity for your day-to-day expenses
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