Single-Premium Deferred Annuity (SPDA)

What Is a Single-Premium Deferred Annuity?

A single-premium deferred annuity (SPDA) is an annuity established with a single payment featuring investment growth solely during the accumulation phase. That growth occurs on a tax-deferred basis until annuitization, at which time regular payments will begin.

Single-premium deferred annuities can be either fixed or variable, and distributions are only taxed when you take them. There is no investment limit governing how much an individual may invest in an SPDA.

Key Takeaways

  • A deferred annuity is a contract between an individual and an insurance or financial company that guarantees income upon maturation, often until the annuitant dies.
  • Single-premium deferred annuities (SPDAs) require only a single lump-sum payment to fund the product.
  • SPDAs are best suited for people planning their retirement who are worried that they may run out of retirement savings, and who have enough cash on hand to fund the up-front premium payment.

What Are Deferred Annuities?

Understanding Single-Premium Deferred Annuities

Single-premium deferred annuities (SPDA) differ from immediate contracts in that they grow tax-deferred for a period of time before annuitization. They also differ from flexible premium deferred annuity contracts where the investor makes multiple payments into the contract following the initial premium during the accumulation phase. The assets in the annuity grow over time.

There are two ways for a buyer of a single-premium deferred annuity to unlock the value of such a product. The easiest and cheapest way is to simply annuitize to create an income stream. The other is to purchase an optional rider, such as a guaranteed withdrawal benefit, in which case the annuitant may access the cash value of the annuity contract while still having an income stream that will last until death.

Advantages of Single-Premium Deferred Annuities

Single-premium deferred annuities are designed for individuals who have a long time before they need access to the funds they put into them. They are beneficial to investors who need steady income and have a lump-sum balance to invest, such as through cash savings, a large stock sale, inheritance, lottery winnings, tax refund, bonus, or any other large cash infusion.

SPDA products have fixed interest features that can provide reliable retirement income and act as a counterweight to market-based investments as part of a diversified financial portfolio. More precisely, SPDAs may feature either a guaranteed interest rate or a rate based on a stock market index. In the case of the latter, the return has a floor of 0%, meaning that the annuitant cannot lose money in a down market.

When the market rises, the annuitant's return is based on a predetermined formula based on the index's gain. Simply put, owners of a single-premium deferred annuity may choose to limit their downside by giving up a portion of their upside.

Compared to low-interest savings accounts or cash, a single-premium deferred annuity may be a far better place to park assets for many investors for a long period of time. For one, tax on interest income is deferred. Also, indexed SPDAs provide downside protection without sacrificing too much upside. This is on top of the annuity benefit of a reliable stream of payments that cannot be outlived.

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