SPIA: What Kind of Annuity Is It?

For those you that do not know what an annuity is: it is an insurance product that generates a steady income for a period of time for investors that put down a set amount of money upfront. There are a variety of annuities, but the one we will be discussing in this article is the single premium immediate annuity, also known as SPIA. This product will turn your investment into guaranteed distributions.

All annuities are contracts that involve an insurance company and a customer, which includes the SPIA. The SPIA is intended to supplement your retirement funds. If you invest in an SPIA with an upfront payment, payouts will either be immediate or will start no later than a year or so. The products do not have a period of accumulation. This is why they are also known to be called immediate annuities.

A commonality that is shared with another annuity called an indexed annuity is that they can bring in interest which can be based on how the market does, it can be fixed, or bet set at a variable. SPIAs can be customized to your preferences, which includes the kind of interest rate you would like, along with the regularity and term of your payouts.

Starting an SPIA will require an upfront payment to buy from an insurance company from your choosing. During this time, you will be able to choose whether you want a fixed interest rate or a variable interest, and also the regularity and time period of the payouts. The payouts generally can be paid monthly, every three months, or once a year.

The payment to invest in the annuity can be paid with after-tax funds or pre-tax money from an investment account, like a 401(k). If the money is pre-tax cash, your payouts will be liable to income tax as opposed to after-tax funds. However, both options will be subjected to tax on earned interest.

Of course, an SPIA will have its advantages and disadvantages. The advantages: an increase in tax-deferment and allows you to have a reliable income when you retire. Another thing that could be an advantage, which is contingent on the kind of person you are, is that this product is known to not have a transparent fee. Usually, the interest rate will have it included.

If you might need to have more funds to your annuity payments for retiring, you can add a COLA, a cost of living adjustment, rider to the annuity. This will give you larger annualization payouts along with inflation.

A negative is a risk of no longer having control of your money. It is recommended that you only start an SPIA if you have significant savings, as it’s highly likely you won’t be able to tap into that cash if you need it for unexpected expenses. With a fixed interest rate, you may lose money or potential earnings with inflation. With a variable interest rate, it is possible to risk your principal or the returns on the SPIA.

Overall, an SPIA could be an excellent investment for those that have a good chunk of money squared away, as they can receive annuitization payments pretty much right away. The plan is quite customizable on selecting the kind of interest rate you want and the regularity of the payments. However, you may wish to speak with your financial advisor to see if it is the right type of investment for you.