Single Premium Deferred Annuities (SPDAs) are not often talked about. Unfortunately, there isn’t a lot of awareness of what this product is, or how it works as a part of a balanced financial portfolio. Single premium deferred annuity products are a resource for turning retirement savings into an income stream, either through annuitization or with the purchase of an optional rider.
If you choose to annuitize your policy, the cash value of the policy is surrendered in exchange for an income stream that remains in place for as long as you live, however if you purchase an optional guaranteed withdrawal benefit rider you can retain access to your cash value and still create an income stream that is guaranteed for as long as you live. SPDA products have fixed interest features and allow for retirement income, which can add balance to a financial portfolio that largely contains market based investments that are subject to market volatility.
What is a single premium deferred annuity?
Indexed Single Premium Deferred Annuities (SPDAs) are designed to work when you have a long time period before you need to access the funds. SPDAs help accumulate and create income on a tax deferred basis and a guaranteed* rate of return. This type of annuity is started with a single lump-sum payment which can grow on a tax-deferred basis with either a guaranteed interest rate or an interest rate based upon a formula tied to a market based index. When the interest is tied to a market based index, the SPDA has a floor rate of 0%, which means that even if the stock market index experiences significant downturns the interest credited to your policy would be 0%, but you will never have a loss due to market returns. When the markets are up, your policy earns an interest rate that is tied to the increase of the index which is subject to rate caps that determine the maximum interest percentage that can be credited, and/or participation rates which determine the degree to which you are able to participate in the increase in the rate. The advantage of this type of product is that it allows you to maximize upside interest potential when the markets are up, without the risk of losing your principal or interest earned due to market downturns.
When is a single premium deferred annuity a good choice?
- If you have a number of years before you plan to retire (10-15), and you have accumulated retirement savings in a market based vehicle that could lose value due to downturns in the stock market, you may want to consider moving this money into an SPDA. In this circumstance, an SPDA would protect your principal and interest earned from loss due to downturns in the stock market, and would allow you to turn your savings into a guaranteed lifetime income stream through annuitization at retirement. Additionally, you could add an optional guaranteed withdrawal benefit rider, which would create a guaranteed lifetime income stream without annuitization. These riders are available with additional cost, and may not be available in all states or on all products.
- If you have money in a conservative savings account, an SPDA may be an excellent alternative. The annuity provides tax-deferral on the interest earned, and for indexed SPDAs, you have the potential for higher interest crediting when the index performs well, while still having the protection of the 0% floor when the markets perform poorly.
- If you’ve recently come into a lump sum of money through a tax refund, bonus, inheritance, or the like, a non-qualified SPDA may be a good choice for long-term savings. In this situation taxes will have already been paid on the lump-sum, but taxes would be deferred on interest earned, and you can still take advantage of all of the other benefits of the SPDA.
- If you are concerned about outliving your savings, then an SPDA makes so much sense as a part of your financial plan. Either through annuitization or the activation of a guaranteed withdrawal benefit rider, an SPDA allows you to turn your savings into a stream of income that can never be outlived. This is really the best feature of this product, it offers certainty and guarantees which allow you to have peace of mind.
A single premium deferred annuity can be appropriate for people of all walks of life. Understanding how SPDAs work and the benefits they offer is just the beginning. Learn more about annuities and the cost of waiting to save.
*Guarantees are based on the claims paying ability of the issuing company.
Carrier does not charge a penalty for withdrawing 10% of your accumulation value. For non-qualified annuities purchased with after-tax dollars, withdrawals of earnings prior to age 59 ½ may be subject to a 10% Federal Tax Penalty. Withdrawals from an annuity are taxable as ordinary income only to the extent there is a gain in the policy. Withdrawals beyond 10% of your accumulation value are typically subject to surrender charges during the early years of the contract.
An Indexed Annuity (IA) is usually a fixed annuity whose interest is determined, at least in part, by the performance of a specified index of the market. Unlike traditional fixed annuities, the policyowner may receive zero interest for a single period on a specific premium payment if the index performs poorly. However, with most designs, the premiums are protected and guaranteed to grow over time, and the owner of an equity indexed annuity may experience better interest crediting than a traditional fixed annuity during periods when the market performs well. Indexed annuities do not directly participate in any stock or equity investments. An investment cannot be made directly into an index. This is not a solicitation of any specific annuity contract.