Key Takeaways

  • A SPIA, which is sometimes referred to as an immediate annuity, is a type of annuity that provides a guaranteed stream of income payments for life off a single, lump-sum premium.
  • Unlike a deferred annuity, a SPIA works by converting a single nest egg into immediate payments instead of paying into an annuity over time.
  • SPIAs are popular among retirees in part due to their simplicity and fewer fees compared to other common annuity offerings. 

What is a Single Premium Immediate Annuity (SPIA)?

A single premium immediate annuity (SPIA) is a contract between you and an insurance company designed to create predictable income. SPIAs are also known as immediate payment annuities, income annuities or immediate annuities.

SPIAs are essentially the opposite of a deferred annuity, where you would pay a recurring premium to build up the value of an annuity over time. When you opt for a SPIA, you exchange a single lump-sum premium for immediate payments that will begin within a year.

They offer a strong opportunity to take an existing nest egg and convert it into predictable payments. Rob Williams, managing director at the Schwab Center for Financial Research, compared it to buying a pension.

“A deferred annuity is usually an annuity that you’ve purchased to grow savings for retirement in an efficient way,” he told Annuity.org. “An immediate annuity is when you have a lump sum and you purchase it so you take the income immediately.”

Did You Know?

Total annuity sales are projected to surpass $300 billion in both 2024 and 2025.

SPIAs are one of the simplest and most consumer-friendly annuity options available. They don’t contain the complexity of other annuity types and tend to not have as many fees.

According to the Insurance Information Institute, 2022 saw approximately $9.2 billion in sales of fixed immediate annuities. 

Chris Magnussen, licensed insurance agent, explains what an immediate annuity is.

Why SPIAs Are So Popular Among Retirees

Part of the popularity of SPIAs is because they solve two common complaints consumers have with annuities: The complexity and amount of fees

SPIAs can be remarkably simple products while serving to guarantee income. Unlike other types of annuities that may involve extended payments or be tied to the performance of investments, SPIAs can be as simple as handing over a lump-sum premium and converting it into predictable payments.

One key indicator of a robust retirement income plan is the ability to meet all essential expenses—such as food, heating, healthcare and housing—with guaranteed income. Having or establishing sufficient guaranteed income enables individuals to enter retirement with confidence, knowing they can reliably cover their most critical bills. For many, a combination of Social Security, pensions or annuities forms this guaranteed income. Among these, income annuities are the primary product people utilize to supplement their retirement income requirements.

There also tend to be fewer fees connected to SPIAs when compared to other common types of annuities like variable or indexed options. Fees often grow with the complexity of the product, so a simple annuity can translate into lower fees. 

Popular SPIA Features

  • Simple product
  • Fewer fees
  • Immediate payments

SPIAs also offer the option to make large contributions without the limitations imposed on 401(k)s, IRAs and other popular retirement plans.

They can enable retirees to supplement Social Security income and pension plans, which might not provide enough to cover their retirement living expenses. In fact, retiring employees can roll their 401(k) plans into a SPIA to create meaningful income for retirement.

“Typically, the average person that’s buying an immediate income annuity is in retirement or about to retire,” Annuity.org expert contributor Stephen Kates, CFP®, explained. 

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What is your goal for purchasing an annuity?

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Case Study

Let’s look at a hypothetical example of a typical SPIA customer to understand the type of person best suited for the product.

Charlotte is 65 years old, one year away from retirement and is looking to invest $100,000. Like many soon-to-be retirees, she’s worried about running out of money once she’s no longer working.

Her best option could be a SPIA, which would guarantee her income for the rest of her life. If she invested in an a conservatively-invested IRA annually, the funds could be depleted by the time she is 82. Annuity payments would continue for her whole life.

Two bar graphs comparing IRA withdrawls and Annuity income

Like Charlotte in the example above, many retirees face the risk of running out of money once they stop working. By purchasing a SPIA, Charlotte can guarantee she’ll receive regular income payments for as long as she lives.

How SPIAs Pay Out

As the term “immediate annuity” implies, the great benefit of SPIAs is that they pay out immediately by converting a lump sum into a stream of payments that you will receive each month, quarter or year. 

When you purchase an immediate annuity, you can customize your income stream with different payout options.

SPIA Payments Over Time

For example, you might choose a single-life annuity that pays out for as long as the annuitant lives. Married couples, on the other hand, may opt for a joint and survivor annuity, which continues to pay out until both annuitants (usually spouses) pass away.

You can also structure payments over a specific period, such as 10 years, which is known as a period certain annuity. Period certain SPIAs are less popular than other alternatives but can be beneficial in certain situations.

For example, someone planning to retire early might invest in a period certain SPIA to provide a source of income for a few years as a bridge until they can begin collecting Social Security.

Each payment you receive from a SPIA consists of your premium, plus a portion of interest earnings. 

With a fixed immediate annuity, each payment to the annuity owner will be the same. On the other hand, if the annuity is variable, the amount of each check will be different because the subaccounts will fluctuate. 

How To Calculate Your SPIA Payments 

There are several factors that go into calculating your SPIA payments. This includes factors such as your age and life expectancy, the amount you wish to invest, and how frequently you would want to receive payments.

With this information, you can create a snapshot of what your SPIA payments would likely be worth.

How SPIA Rates Are Determined

The interest rate on an immediate annuity can be:

Each annuity interest rate option has its benefits and drawbacks. Fixed-rate SPIAs are more reliable and their rates are often more favorable than certificates of deposit (CDs) and U.S. Department of the Treasury rates. However, receiving the same amount of money each year means your payments likely won’t keep up with inflation.

Immediate annuities with variable rates are more likely to hedge against inflation as their payments can change based on market performance. But the changing payment amounts make the income from these annuities less predictable.

Lock In Fixed Annuity Rates as High as 6.9%

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Buying an Immediate Annuity: Pre-Tax vs. After-Tax Funding

Annuities are insurance products, not investments. This means that the IRS considers the payment streams they generate to be income, so the payments are subject to income taxes. But the tax treatment of those income payments is determined by the type of premium used to fund the annuity. 

Pro Tip

Taxation of your immediate annuity payments depends on where the funds you purchased the annuity with came from. If you buy an immediate annuity in a state that levies a state premium tax on annuities, you’ll pay the premium tax at the time of purchase.

If you fund your annuity with after-tax dollars, you own a nonqualified annuity. This means that when you receive disbursements, the IRS considers a portion of every payment to be a return of principal and that portion is not taxed.

The portion of your payment that is generated by interest earning is still taxable.

If you purchase your annuity with pre-tax money, your annuity is qualified, and the entire amount of each payment is subject to ordinary income tax rates. Funds for qualified immediate annuities come from retirement plans like IRAs, 401(k)s, SEP plans and corporate-sponsored defined contribution plans.

Moreover, if your SPIA purchase is made from a Roth IRA, then you will be able to enjoy the benefit of tax-free income for the rest of your life.

Since SPIAs annuitize immediately, your premium is instantly converted to a stream of regular payments. If that is not your goal — for example, you already have another form of reliable retirement income, or you would prefer having a lump sum of cash accessible — a SPIA is not the right product for you. 

Pros and Cons of SPIAs

As with any financial product, there are trade-offs when you opt for a SPIA. In exchange for a guaranteed stream of payments that can last the rest of your life and begin right away, you are giving up a significant lump-sum payment, as well as the liquidity of that cash.

You should weigh both the pros and cons of the product carefully before determining if a SPIA is the best fit for your situation.

Pros

  • Guaranteed and Immediate Income

When you purchase an immediate annuity, you transfer risk to an insurance company that, in turn, begins paying you within the first year of your contract.

  • Fewer Fees

Immediate annuities rarely have any account management or account maintenance charges.

  • Simplicity

Purchasers appreciate the easy and reliable payment stream afforded by SPIAs. Once established, an immediate annuity requires no maintenance or work.

  • Plan for Retirement

Many people use SPIAs to fund their retirement. Often, retirees prefer the product’s reliability to the volatility of the stock market.

  • COLA

For an added cost, you can purchase a cost-of-living adjustment (COLA) rider for your SPIA, which will increase your annuity payments over time depending on how the rate of inflation has increased. However, it’s important to evaluate this option carefully with a financial advisor because this feature typically produces substantially lower beginning payments.

  • One-Time Withdrawal

Some insurance companies offer one-time cash advance options for annuitants who have an immediate need for cash. Otherwise, you cannot change your annuity, and it will only pay the set amount on the disbursement schedule.

  • Mortality Credits

Risk pooling, or the spreading of risk across many accounts, allows premiums from annuity owners who die prematurely to be used to pay benefits for those who live beyond their life expectancy. These so-called “mortality credits” can increase your returns above those of other options and, by choosing a lifetime benefit option, you can hedge against ever outliving your available assets. 

  • Legacy Options

There is some misconception that SPIAs will not pay benefits to your heirs when you pass. While it is possible to elect a payment optimized for the highest income that contains no death benefits (sometimes referred to as a straight life annuity), most SPIAs sold contain death benefits.

Cons

  • Loss of Control

The most significant drawback of SPIAs is that they are irrevocable. Once you exchange your lump-sum payment for periodic distributions, you no longer have control or access to your money.

  • Loss of Purchasing Power

If your SPIA does not contain an inflation adjustment feature, your payment may not be keeping pace with inflationary trends.

  • Variable Annuity Risk

Most SPIAs purchased today are fixed SPIAs. If your SPIA is variable, which means it contains market risk, then your payment stream could decline based on changes to subaccounts invested in risk-based assets.

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Best Immediate Annuities

There isn’t one specific SPIA option that is the best fit for everyone. The choice that makes the most sense for you will depend on your personal circumstances.

A good place to start is by determining what your goals are and what you hope to achieve from the annuity. Will this purchase only benefit you or also a spouse? Do you need income for life or just for a bridge period, such as until you take Social Security?

Answering these questions can help you nail down which type of SPIA — and which available features — will best benefit you.

Comparing different issuers’ offerings is also huge. Different companies may offer different rates and features.

“When shopping for an immediate annuity, it’s most important to look at how competitive the payout rate is, and different annuity companies will offer higher or lower ones. They’re all competing in the marketplace,” Williams said. 

“All else equal, getting the higher payout rate is better because that means that someone there at the annuity company is saying ‘Hey, we may accept less profit on it or we think we can invest in a way that will make us some money.’”

Frequently Asked Questions About Single Premium Immediate Annuities (SPIA)

Do I lose control of my money when investing into a SPIA?

General SPIAs are set up for a lifetime stream of income that requires that you annuitize the payments, thus giving up control of your principal. This is a very important decision to not take lightly.

Can the SPIA income payment be deferred?

If you elect to defer your income payments until later to create a higher lifetime income stream, then this is referred to as a DIA (Deferred Income Annuity).

What is the period certain?

In the case of a 10-, 20- or 30-year period certain, you are electing to have the income payments continue for a specific number of years, even if you die early. For example, if you selected a 20-year period certain option with lifetime income and died after 15 years of payments, your designated beneficiary would receive the remaining 5 years of the period certain.

What is a cash refund in a SPIA/DIA? 

When funding a SPIA or a DIA, you have the option to choose a cash refund feature. This means that if you die before exhausting your initial premium, the remaining balance will be refunded to your beneficiaries.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 13, 2024
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