Single Premium Immediate Annuity (SPIA)
A single premium immediate annuity offers a stream of guaranteed income in exchange for one up-front, lump sum payment. It's one of several annuity options available for people looking to simplify their retirement income and protect their retirement savings from market volatility.
More than $3.6 billion in single premium immediate annuities (SPIAs) were sold in the first quarter of 2024, part of a growing trend in annuity purchases across the United States.1 Understanding how SPIAs work can help you decide the appropriate use of your money when planning for the future.
Single premium immediate annuities begin payments immediately, unlike deferred annuities, which defer the start payments until a future date.
Some of the advantages of SPIAs include simplicity, lower fees, and guaranteed income, but the tradeoff is loss of control over the money.
Your age and other factors can influence the taxation of your annuity payments.
Optional riders can give you more flexibility and control, including accelerating payments, protecting against cost of living increases, and receiving a lump-sum distribution.
What is a single premium immediate annuity (SPIA)?
With a single premium immediate annuity, the annuitant purchases a guaranteed stream of payments in exchange for a lump sum premium, paid up front. While it's not a pension, it serves a similar purpose because it provides the regular guaranteed payments the buyer can count on.
SPIAs are an insurance product, not an investment, so taxation must be a consideration. Both fixed and variable options may be available for single premium immediate annuities, as well as liquidity riders, accelerated payments, and inflation protection. You may be able to purchase a joint policy, which can continue to provide annuity income to your spouse or co-annuitant after your death.
In general, immediate annuities start making annuity payments "immediately": typically within a month (and never more than one year out), instead of many years down the road. Immediate annuities can provide payments for a lifetime or only for a set period, and some offer non-guaranteed dividend payments in addition to the guaranteed income.
How single premium immediate annuities work
As the name implies, you purchase a single premium immediate annuity with one lump-sum premium payment, paid up front. This lump sum payment may come from another retirement vehicle using pre-tax dollars, such as a 401(k). This makes it a qualified annuity for tax purposes. It can also be purchased using after-tax dollars, such as from a Roth IRA, savings account, financial windfall, or other large source of funds, making it a non-qualified annuity.
Soon after purchasing your SPIA, you'll begin to receive regular payments according to the contract or policy agreement. The IRS considers the income from qualified annuities to be ordinary income and will tax it accordingly. If it's a non-qualified annuity, you will typically only be taxed on earnings. (See Tax implications below)
How they pay
Annuity payouts from a single premium income annuity are paid at regular intervals. Monthly payments may be the norm, but you can also choose quarterly, semi-annual, or annual payments; that timing typically cannot be changed once payments have begun. In general, you'll receive fixed annuity payments, although the options and riders you select may result in increasing payments (such as if you choose a cost-of-living adjustment). Often, you can select which day of the month you'd like to receive your annuity payments.
When they pay
You can elect to receive annuity payments for your entire lifetime or for a set amount of time, such as 10, 20, or 30 years. This annuity payment option is called "period certain." Period certain options are sometimes used to help retirees bridge the gap between the end of employment and when they begin collecting Social Security or other pension benefits.
A joint life annuity (i.e., owned by two people, typically a married couple) with "survivor" benefits will continue to make payments until the last annuitant dies. Annuities with the Refund Certain option can provide a lump-sum distribution of the remaining net premium value (less applicable taxes) to a named beneficiary after the annuitant's death.
How much they pay
Annuity payments are calculated based on your age and gender (which impact longevity) plus the date of your first annuity payment, as well as the amount of premium, your selected payment option, payment frequency, and the interest rate environment at the time of purchase. You may be able to choose options such as a cost of living adjustment, which will increase your payments over time, although initial payments will be lower. Use a retirement calculator to get an idea of how much you'll need to meet your goals in retirement.
Case study: Michael's SPIA
To better understand how single premium immediate annuities work, consider a hypothetical example.
Michael, age 65, is planning for retirement. He owns a Roth IRA, 401(k), and taxable brokerage investments, but he's worried about market volatility eroding his funds.2 To help protect against the risk of running out of money in retirement, Michael decides to invest $150,000 in an annuity to secure a steady stream of income.
With one up-front payment, Michael's purchase of a single premium immediate annuity secures a lifetime of guaranteed income. He selects a SPIA; to help protect against the drop in purchasing power that accompanies inflation, he adds a cost-of-living adjustment (COLA) rider, which increases his annuity payments by a set percentage each year. Michael now receives a regular, monthly annuity payment, which will be supplemented by his retirement savings and eligible Social Security payments to help cover his expenses.
Cost considerations
Costs for immediate annuities are higher when you choose optional add-ons and riders. Keep in mind that single premium immediate annuities are not liquid; once you purchase the policy and start receiving payments, you're typically locked in.
To calculate the cost of an immediate annuity, the insurer will account for your age, gender, state of residence, and whether the annuity is just for you or will be a joint life annuity. The premium amount, payment frequency, and options will also affect the cost.
Tax implications
Those considering a single premium immediate annuity should consider the tax implications of their purchase. The following are a selection of tax considerations involving single premium immediate annuities; consult your financial professional for advice specific to your situation.
Taxable payments: Annuities purchased with after-tax dollars (non-qualified annuities) have payments that are partially subject to income tax. Typically each payment will comprise a portion that is considered to be a return of premium and is not taxable, as well as an income portion that is considered taxable income by the IRS.
Annuity tax: In some states, your premium payment may be subject to an annuity tax. This tax may be deducted from your premium by the insurer prior to scheduling payments.
Federal income tax penalty: Immediate annuity payments typically aren't subject to the 10% federal income tax penalty that generally applies to retirement distributions received before age 59 ½.
IRA rollovers: The IRS typically prohibits rolling over annuity payments into a traditional IRA.
Qualified distributions from a Roth IRA: You may be able to purchase your annuity using funds from a Roth IRA, if you have held the Roth IRA for at least five years and are age 59.5 or older when you receive your first payment,3 and have the payments considered qualified distributions under the internal revenue code (IRC).
Pros and cons
As with any insurance or investment type, there are pros and cons to single premium immediate annuities. Consider the advantages and disadvantages of this type of annuity.
Pros | Cons |
|---|---|
Guaranteed income | No control over the money |
Potential for Fewer fees | Can lose purchasing power with inflation |
Simple structure | |
Customizable riders for flexibility | |
Less volatile than market investments | |
May include death benefits |
How SPIAs compare to other annuities
SPIAs have a lot in common with other annuities. For instance, both an immediate income annuity and a deferred income annuity transfer risk to the insurance company in exchange for a premium. Each will pay you (or you and your spouse or other co-annuitant) a guaranteed income for life. The main difference is that an immediate annuity begins payments immediately, while a deferred income annuity doesn't pay out until later.
Single Premium Immediate Annuity Vs. Deferred Annuity
Single Premium Immediate Annuity | Deferred Annuity |
|---|---|
Payments can begin next month or within the year | Payments begin the following contract year or up to 40 years later |
Premium paid in a lump sum | Can be purchased with multiple premium payments |
Often chosen by those nearing retirement | Often chosen by those still saving for retirement |
Designed for immediate payments | Designed for later payments with principal growth |
Limited flexibility once payments begin | More flexibility with access to funds, if you haven’t annuitized |
Customization options
Depending on the SPIA product you choose, you may be able to customize your policy to add more flexibility. Some examples include:
Payment acceleration rider: For example, the Guardian Guaranteed Income Annuity III℠ offers a payment acceleration rider that allows the annuity holder to receive several months' worth of payments at once.
Liquidity benefit: Guardian also offers a one-time Commutation Withdrawal Rider, which gives access to a portion of remaining guaranteed payments if you have an unexpected need of cash.
COLA rider: Some policies offer a cost-of-living adjustment rider, which increases payments by a set percentage annually to help you keep up with inflation.
Is a SPIA appropriate for you?
A single premium immediate annuity could be appropriate choice for you if:
You're looking for a guaranteed stream of income
You want payments to start immediately
You have assets to spend on a lump-sum premium
You want some protection against your money running out in retirement
You're willing to give up control over the principal
Factors to consider
Before deciding whether a single premium immediate annuity is the right choice for your situation, keep the following in mind:
The financial strength of the annuity company: You want to be confident of receiving lifetime income, so it's essential to choose an insurance company with proven financial strength and claims paying ability. Look for companies with high ratings from agencies such as AM Best or Moody's Investor Service. For instance, Guardian's wholly owned subsidiary, The Guardian Insurance & Annuity Company, Inc., has an A++ Superior rating from AM Best — the highest possible of 21 ratings.4
Age restrictions of the policy: Some annuities have restrictions on issue ages. For example, you may not be able to purchase a certain annuity if you're over the age of 85. Check with your financial professional for your options.
Purchase amount: You may be limited by an annuity's minimum or maximum purchase amount. For example, some annuities set a minimum purchase amount of $20,000 or more. Make sure the annuity you choose suits your budget.
Annuity rates: Annuity companies compete with each other for customers, and that influences the rates they offer. It's worth it to shop around to find an annuity with the rates and features you're looking for.
Get help with your annuity questions
Connect with a local financial professional who can explain the different options, including single premium immediate annuities, fixed annuities, fixed index annuities, and variable annuities, and who can then help you decide what makes sense for your situation.