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What Is a Single Premium Deferred Annuity (SPDA)?


A single premium deferred annuity is a financial tool you can use to plan for retirement. This insurance product offers you guaranteed income, beginning at a date you specify, along with tax-deferred growth of interest earned on your policy. If you’re considering this annuity for your retirement plan, here are the most important things you need to know.

Consider working with a financial advisor as you evaluate specific annuity options.

Single Premium Deferred Annuity Explained

Understanding what a single premium deferred annuity is and how it works begins with understanding how you fund annuities. With some annuities, you pay the premiums in multiple installments. Others take one lump sum premium up front when you purchase the annuity contract.

That’s how you fund single premium deferred annuities. When you buy this type of annuity, you make one single premium payment at the outset. For example, say you receive a large inheritance or you’re rolling over money from a previous employer’s 401(k). You could use those funds to purchase the contract. Once you’ve done that, you don’t need to pay anything else toward the premiums for the annuity.

There may be a minimum amount you need to pay toward the premium, such as $5,000. There may or may not be a cap on single premium payments, depending on the annuity contract. For example, you may contribute only $500,000 or $1 million to the annuity.

That explains how the money gets into a single premium deferred annuity. The “deferred” part explains when you withdraw it you’re ready to begin receiving annuity payments. You defer or delay them until you’re ready to withdraw them. For example, you might purchase a single premium deferred annuity at age 50. However, you can start withdrawals when you retire at age 65. In the meantime, the money in the annuity grows on a tax-deferred basis.

Deferred annuities differ from immediate annuities, which usually begin to provide payments within a year of purchasing the contract.

Single Premium Deferred Annuity Benefits

Single Premium Deferred Annuity

These annuities have several attractive features for investors with lots of time.

First, single premium deferred annuities can offer a guaranteed rate of return. That means you can predict how much your policy may grow. This can make planning retirement easier if you have other sources of income, such as Social Security benefits or a 401(k) or individual retirement account.

Next, single premium deferred annuities may offer guaranteed principal protection, meaning you’ll always be able to get back at least what you put into the contract. For example, say you received a $500,000 inheritance and used that to purchase one of these annuities. As a result, you’ll receive that amount back once the annuity payments begin.

Assuming your annuity grows in value, the interest earned is tax-deferred. That means you wouldn’t owe taxes on it until you begin taking distributions from the annuity. With a qualified annuity, which is funded through a tax-advantaged plan such as a 401(k), both the amounts you pay in and the interest earned is taxable. A nonqualified IRA, which is funded with after-tax dollars, would only be taxable as far as interest gains are concerned.

Potential Drawbacks

There are a few things to keep in mind if you’re considering a single premium deferred annuity. The first thing to assess is whether you might want a fixed or variable annuity contract.

With a fixed annuity, the rate of return is generally guaranteed. With a variable annuity, it’s not. Variable annuities can offer the potential for greater returns if the underlying investments in the annuity perform well. However, you’re usually taking on a higher degree of risk to try and achieve those returns. For that reason, a fixed single premium deferred annuity might be preferable if you’re looking for a lower risk option.

Also, you may pay a surrender charge you might pay if you need or decide to cash out the annuity early. A surrender charge is a fee you pay to the insurance company to end your contract. The amount of the charge is often determined on a yearly basis and decreases the longer you own the annuity. Within the first five years, for example, the surrender charge may be 7% to 10% each year. But after year five, it may decrease by a percentage point each year until the fee reaches zero.

Finally, keep in mind that an annuity is an insurance policy, not an investment in a tradable security like a stock, commodity or mutual or exchange-traded fund. Such securities often provide capital appreciation that, by definition, are not possible in an insurance policy.

Single Premium Deferred Annuity Research

If you think this type of annuity might be right for you, there are a few things to keep in mind.

First, consider when you’ll need to begin receiving income from the annuity. A single premium deferred annuity tends to be more beneficial when you have a longer window for the accumulation phase when your money is growing. If you need to start receiving monthly income payments right away, an immediate annuity might be preferable.

Next, think about how much you can realistically afford to spend on paying the upfront premium. If you don’t have $5,000, $50,000 or $500,000, for example, you might want to look at something like a flexible premium annuity instead. With this type of annuity, you can make one small initial premium payment, then continue paying premiums over time.

Finally, take a look at the terms of the annuity contract itself, including fees and any riders that are available. See if there’s a free look period. It lets you cancel the annuity contract without a penalty within a certain time frame. It’s also good to assess the surrender charge and other annuity fees you might pay. Include any expenses associated with the underlying investments so you know what the annuity will cost over time.

The Bottom Line

Single Premium Deferred Annuity

A single premium deferred annuity is just one option for adding an income stream in retirement. If you have a large sum of money to work with, it could be a useful way to supplement your other retirement assets. Remember that while you can defer taxes on the growth in your annuity, you can’t avoid them entirely once disbursements begin, so you’ll need to include the tax implications in your financial planning strategy.

Retirement Planning Tips

  •  Consider talking to a financial advisor about single premium deferred annuities or annuities in general. Such an advisor can explain the benefits and potential drawbacks of using an annuity to plan for retirement. Finding a financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Compare the projected returns you may get with a single premium deferred annuity to the return you could get by investing the money you’d use to pay the premiums elsewhere. Consider the liquidity factor as well. You might be able to get the same or a similar rate of return using a certificate of deposit, for example, and it may be easier and less expenses to terminate a CD early compared to getting out of an annuity.

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