Single-Premium Deferred Annuities: Definition, Benefits, and How to Choose


Explore the benefits and considerations of a single-premium deferred annuity (SPDA). Discover how this financial tool can help you secure a reliable source of income during your retirement years, the tax advantages it offers, and the factors to consider when choosing the right SPDA for your financial goals. Dive into the world of SPDAs and make an informed decision about your retirement planning.

What is a single-premium deferred annuity?

A single-premium deferred annuity (SPDA) is a financial product that allows individuals to establish an annuity with a single lump-sum payment. The unique feature of SPDAs is that they offer investment growth solely during the accumulation phase, and this growth occurs on a tax-deferred basis until annuitization. At this point, regular payments from the annuity commence.

SPDAs are a valuable financial tool for individuals seeking a secure source of income during their retirement years. Let’s dive deeper into the various aspects of single-premium deferred annuities.

Understanding single-premium deferred annuities

SPDAs differ from immediate annuity contracts, where payments begin right away. Instead, they grow tax-deferred over a specified period before annuitization. Unlike flexible premium deferred annuity contracts, which allow multiple payments over time, SPDA investors make a single upfront payment to fund the annuity during the accumulation phase. The assets within the annuity grow steadily during this period.

There are two primary methods to access the value of a single-premium deferred annuity:

  1. Annuitization: This is the most straightforward and cost-effective approach. Annuitization transforms the annuity into a regular income stream, typically lasting until the annuitant’s death.
  2. Purchase of optional riders: Some annuitants choose to enhance their annuity by purchasing optional riders, such as a guaranteed withdrawal benefit. This option allows them to access the annuity’s cash value while still receiving a steady income stream for life.
Weigh the risks and benefits

Here is a list of the benefits and the drawbacks to consider when it comes to single-premium deferred annuities.

  • Tax-deferred growth: SPDA owners can enjoy the advantage of tax-deferred growth on their investment until they start receiving payments.
  • Guaranteed income: These annuities provide a reliable stream of payments, ensuring financial security during retirement.
  • Flexible payment options: With optional riders, annuitants can access the annuity’s cash value while still receiving an income stream for life.
  • Early withdrawal penalties: Withdrawing funds from an SPDA before a certain age may result in penalties and fees.
  • Illiquidity: SPDAs are intended for long-term retirement planning, so they may not be suitable for individuals who need access to their funds in the short term.

How to choose the right single-premium deferred annuity

When selecting an SPDA, consider the following factors to ensure it aligns with your financial goals and retirement plans:

Financial goals

Determine your financial goals and objectives. Are you looking for a steady stream of retirement income, or do you want to balance market-based investments with guaranteed income? Your goals will influence the type of SPDA that’s right for you.

Payment options

Consider the various payment options available within the SPDA. You can choose between a fixed interest rate or an interest rate tied to a stock market index. Understand the benefits and limitations of each option and how they align with your preferences.

Optional riders

Explore optional riders, such as a guaranteed withdrawal benefit. These riders can provide added flexibility by allowing you to access the cash value of the annuity while still receiving an income stream for life. Assess whether these riders are suitable for your needs.

Tax considerations

Take into account the tax benefits of SPDAs. The tax-deferred growth can offer significant advantages, especially if you anticipate being in a lower tax bracket during retirement. Consult a tax professional for personalized advice.

Time horizon

Assess your time horizon for needing access to the invested funds. SPDAs are intended for long-term retirement planning, so they may not be suitable if you require immediate liquidity. Consider whether you have other accessible sources of funds for emergencies.

Frequently asked questions

Can I purchase a single-premium deferred annuity with a smaller lump-sum payment?

Yes, while SPDAs are commonly associated with a single, substantial lump-sum payment, some insurance companies may offer options for lower initial premiums. However, the terms and benefits may vary depending on the payment amount.

Are there any age restrictions for accessing funds from an SPDA?

SPDAs are typically designed for long-term retirement planning, and accessing funds before a certain age may result in penalties and fees. The specific age restrictions can vary among different annuity contracts, so it’s essential to review the terms and conditions of your particular annuity.

Are there any limitations on the frequency of payments from an SPDA?

The frequency of payments from an SPDA can vary. Some annuitants may opt for regular, periodic payments, while others may choose a lump-sum payment. The flexibility in payment options depends on the annuity contract’s terms and any selected optional riders.

Do SPDAs provide inflation protection?

SPDAs typically do not provide automatic inflation protection. If inflation is a concern, you may want to explore inflation-adjusted annuities or consider other investment options to safeguard your purchasing power over time.

Can I change the beneficiary of my SPDA?

Yes, most SPDAs allow you to designate a beneficiary, and you can typically update this information. This ensures that in the event of your passing, the annuity’s value can pass to your chosen beneficiary, avoiding probate.

What happens to my SPDA if I pass away before annuitization?

If the annuitant passes away before the annuitization phase, the treatment of the annuity depends on the specific terms of the contract. In many cases, the annuity’s value may pass to the designated beneficiary or the annuitant’s estate.

Are SPDAs suitable for individuals who need short-term access to funds?

SPDAs are primarily designed for individuals with a long time horizon before they need access to their funds. If you require short-term access to your investments, you may want to consider other financial products that offer greater liquidity.

Key takeaways

  • A single-premium deferred annuity (SPDA) is a financial contract that requires a single lump-sum payment and offers tax-deferred growth.
  • SPDAs are designed for individuals who want a reliable source of income during retirement and have a lump-sum amount available for investment.
  • SPDA products can have fixed interest features or be tied to a stock market index, offering both guaranteed income and market-based potential returns.
  • Compared to traditional savings accounts, SPDAs offer tax benefits and downside protection while providing a guaranteed stream of payments during retirement.
  • Consider factors like your financial goals, payment options, optional riders, and tax considerations when choosing the right SPDA for your needs.
View article sources
  1. Stat 344 Life Contingencies I Chapter 1: Introduction – Brigham Young University
  2. Understanding Retirement Annuities – University Of Hawaii
  3. Chapter 1 – Life Contingent Financial Instruments – University of Florida
  4. Consumer’s Guide to Understanding Annuities – Wisconsin Department of Natural Resources
  5. Demystifying Qualified Annuities: A Comprehensive Guide to Retirement Planning – SuperMoney