If you decide to purchase an annuity, there are different types of annuities you can choose from and choose if you want to purchase with a lump sum of money or a series of payments over time.
Different Types of Premium Annuities
The money used to purchase an annuity is known as a premium. There are two options are:
- Single premium annuity, which is a lump sum payment
- Flexible premium annuity, which are a series of payments
There are two main types of single premium annuities:
- Single premium immediate annuity, also known as an SPIA
- Single premium deferred annuity, or an SPDA
Here's some information on both.
What Is a Single Premium Immediate Annuity?
A single premium immediate annuity begins paying income within one year of purchase.
It is funded with one lump-sum payment. In return, you receive a stream of income that can last:
- For your lifetime
- For a set number of years
You could also purchase a single premium immediate annuity that makes payments for your whole life while also guaranteeing payments for a minimum number of years in the event you die. For example, if you purchased an immediate annuity for life with a guaranteed payout period of 10 years but then died before the end of the 10 years, your beneficiaries would receive payments for the rest of those years.
What Is a Single Premium Deferred Annuity?
A single premium deferred annuity is funded with one lump-sum payment. These kinds of annuities begin at a later date, often during retirement.
For example, you might purchase this annuity at age 55 and plan to start payments at 65. In most cases, you must be at least 59½ to withdraw funds without a 10% IRS tax penalty.
How Payments Work
When the annuity reaches its payout date, you generally have a few options:
- Lump Sum: Take the full value at once.
- Income Stream: Receive regular payments over time is known as annuitization.
- Transfer: Move the funds into another annuity, if allowed.
The Accumulation Phase
The time between purchase and payout is called the accumulation phase. During this period:
- Your premium has the potential to grow
- Growth is tax-deferred
- Taxes are due when you withdraw funds
- Early withdrawals may trigger fees and a 10% IRS tax penalty
Types of Deferred Annuities
Deferred annuities fall into three main categories:
- Fixed: Earns a set interest rate stated in the contract.
- Variable: Funds are invested in sub-accounts within an investment portfolio.
- Fixed Indexed: Growth is tied to the performance of a market index.
Growth may vary based on the type of annuity selected, and it is not always guaranteed.
What to Consider Before Purchasing a Single Premium Annuity
People often buy a single premium annuity when they:
- Roll over a retirement account
- Sell an appreciated asset
- Receive a large lump sum, such as life insurance proceeds
If you have a large sum to invest, consider which type of annuity fits your needs.
Single Premium Deferred Annuity
With a single premium deferred annuity, your money may grow during the accumulation phase, depending on the annuity type. You can delay payments until you decide to begin receiving income.
Keep in mind:
- Access to your premium may be limited until the annuity matures
- Surrender charges apply if you end the contract during the surrender period
Single Premium Immediate Annuity
A single premium immediate annuity may allow you to start receiving payments sooner. Typically, you do not pay surrender charges to begin income.
Flexible Premium Annuity
If you prefer to contribute part of your money now and add more later, a flexible premium annuity may be worth considering.
To review your options and determine what aligns with your goals, speak with a financial representative.
Final Thoughts
Single premium annuities can provide either immediate income or future growth, depending on how and when you want to receive payments. The right option depends on your timeline, income needs, and how much access you want to maintain to your money. A financial representative can help you review your goals and determine which type of annuity may fit your overall retirement strategy.
