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What is a Single Premium Deferred Annuity?

Published on: Aug 05 2021
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By Olivia Faucher

An annuitant who buys a single premium deferred annuity (SPDA) does so by making a cumulative payment and then waiting to receive payouts at a predetermined time in the future.

The single premium deferred annuity allows the annuitant to build the value of the original lump sum payment by collecting interest payments each year. The product could be right for certain people but not for those who expect to need the money before the payments are scheduled to begin.

Definition of Single Premium Deferred Annuity

A single premium deferred annuity (SPDA) by definition is a deferred annuity that is paid for by the annuitant with an upfront, lump sum. The following is an example of a single premium deferred annuity: 

Victoria, a 50-year-old woman, opens a deferred annuity account with a lump-sum premium payment of $100,000. Her principal investment of $100,000 grows in her account for the next 15 years, and she has access to her annuity payouts beginning when she is 65 years old. Over the course of the 15 years, her initial investment grows at an annual interest rate of 3.5%, and her annuity is worth $167,535 by the time she is 65 years old. When Victoria turns 65, she begins to receive monthly payouts from her annuity that are set to continue for the remainder of her life. Her payouts are the same amount each month, $785. Because of her single premium deferred annuity, Victoria can have peace of mind that she will always have a reliable source of income.

How Does a Single Premium Deferred Annuity Work? 

A single premium deferred annuity requires the annuitant to make an upfront payment to the insurance company, with the guarantee that he or she will receive payments in return, once the annuitant reaches an age that is specified in the contract.

Single premium deferred annuities include two phases in their process. Once the annuitant funds the account with the lump sum payment, the annuity immediately enters the accumulation phase. The accumulation phase is the period of time after the annuitant has made the payment, but before he or she starts to receive payouts. During the accumulation phase, the invested principal sits in the annuity and accrues interest. The accumulation phase generally lasts five years or more. This accumulation phase is beneficial to the annuitant because it allows the money to grow over time, and therefore receive larger payouts in the future.

Eventually, the annuity enters the second phase that is called the payout phase. The beginning of the payout phase is specified in the annuity contract and will be a number of years after the premium payment is made.

The payouts can be made for a chosen length of time or for the remainder of the annuitant’s life. Like immediate annuities, deferred annuities allow the annuitant to decide how frequently he or she wants to receive payments, whether monthly, quarterly or yearly. Also similar to immediate annuities, deferred annuities offer flexible payout options such as making it a joint annuity, cash refund options and guaranteed payments to beneficiaries for a specified length of time.

Single premium deferred annuities differ from immediate annuity contracts in that the payouts do not begin right away and the principal has the opportunity to accrue interest over the period of time that the payouts are deferred. The assets in a deferred annuity grow over time before any payouts are made, whereas immediate annuities do not have the same growth opportunity because the payouts begin right away. 

Single premium deferred annuities also vary from flexible premium deferred annuities because the caveat of a flexible premium requires the annuitant to fund the account with a series of payments throughout the accumulation phase, rather than paying for it with one lump sum.

Advantages of owning an SPDA

Single premium deferred annuities are cheaper to buy upfront than immediate annuities, and they enable the annuitant to choose the specific date at which it will be ideal for them to start receiving payouts.

Most importantly, deferred annuities allow the money in the account to grow during the period of time that the payments are being delayed. The money in the annuity will accumulate earnings in a tax-deferred manner, and the original investment may grow substantially over time, which will result in larger payouts to the annuitant when the payout period begins. Giving the original principal the opportunity to grow in the accumulation period means that deferred annuities offer significantly higher payouts than an immediate annuity for the same upfront cash investment.

Additionally, single premium deferred annuities can offer a fixed rate of return, allowing the annuitant to accurately predict how much the investment will grow. Knowing exactly how much the annuity will pay out can make retirement planning significantly easier, especially with other sources of income such as social security or a 401(k). 

Disadvantages of Single Premium Deferred Annuities

The most obvious drawback of owning a deferred annuity is the fact that the payouts are delayed. If the annuitant wants access to their money before the payout phase begins, he or she will be hit with a surrender charge in order to withdraw money from the account. An Annuitant who is considering purchasing an annuity with deferred payouts should be sure to consider whether or not he or she will be in need of that income soon.

Who Should Buy a Single Premium Deferred Annuity? 

Deferred annuities can be useful in a myriad of situations. Deferred annuities appeal to those who want the security of having guaranteed income in the future, and are not in need of a steady stream of income right now. Deferred annuities are best for people who are planning ahead and wish to have the peace of mind that he or she will have reliable income in the future. Single premium deferred annuities can also be a good fit for people who have limited resources at the time of the annuity purchase due to the fact that this type of annuity requires a lower payment upfront. Someone with limited resources who wishes to receive guaranteed income in the future can purchase an annuity and let the principle grow over time to collect more substantial payments down the road.

Special thanks in preparing this summary of “What is a Single Premium Deferred Annuity?” goes to Bob Carlson, leader of the Retirement Watch advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.

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