Immediate Income Annuity

For some retirees, a single premium immediate annuity (SPIA) might be the best option for comfortable, stress-free investing and guaranteed income. There are many types of annuities, including fixed or lifetime period, nonqualified or qualified, deferred or immediate, and single or flexible premium. The SPIA in particular offers the annuitant the chance to receive their funds with interest via monthly payments immediately. "Deferred" postpones the payments to a much later date, possibly a decade or more away. The SPIA is called "single premium" because the annuitant must deposit a lump sum with the insurance company. In some cases, this is the best means to ensure that one has available income for the future. In other cases, this may not be the best option. A little research and professional advice will lead to the best decision.

A 64-year-old man wins a lawsuit and is awarded a lump sum of $105,000. He would like to retire and live off of the funds. His best bet could be an immediate income annuity or SPIA. A month after he drops the funds into the annuity, a monthly payment is deposited into his bank account. These equal monthly payments can continue for a set period of time such as 10 or 15 years (fixed) or can continue for the remainder of the man's life (lifetime). The choice between fixed and lifetime depends on the single premium amount, the age of the annuitant, and the interest that the insurance company agrees to pay. In this case, the 64-year-old with such a large single premium would best benefit from a lifetime annuity.

A 55-year-old woman wins $250,000 in the lottery after taxes. She is thinking about getting a single premium immediate annuity, so she can be retire early and still receive an income plus her pension. Yet, she owes $187,000 on her house and another $32,000 in credit cards and personal loans. "The rich ruleth over the poor, and the borrower is servant to the lender" (Proverbs 22:7). Truly, if this woman wants to stop being a slave to her debtors, she will want to spend this money getting out of debt and staying out of debt. With her debt erased, she can spend just a few more years working and then retire completely debt-free with her pension. In this situation, a SPIA isn't the best option.

Each situation is unique, but there are common threads in the need for an immediate income annuity. The person should already be retired or ready to retire immediately. Since this product is a very hands-off form of investing, some retirees may not like it. They might prefer to build a portfolio and actively buy and sell stocks to build up retirement. Also, the income from the annuity should be sufficient enough to support the retiree's needs. For most immediate annuities, the recipient needs to be at least 55. Additionally, many retirees decide to obtain a SPIA because they don't have a retirement plan or pension in place. It may be best to consider the benefits and disadvantages to weigh whether or not a SPIA would work for one's individual situation.

The benefits of a single premium immediate annuity are usually what attract people to them. If a large savings account is maintained, it must be claimed annually for tax purposes. On the other hand, a SPIA funds, depending on if they're pre-tax or not, can be tax-deferred or tax liability will be less overwhelming as it is paid in smaller installments. Another benefit is that the annuitant can be guaranteed a certain interest rate, and the payments are in a set amount that never decreases. Therefore, this option offers a sense of security for retirees. Not only that, annuitants don't have to stress over the stock market or worry about their money disappearing. Lastly, some companies won't charge fees for their investment products or services.

While there are benefits to obtaining an immediate income annuity, there are also some disadvantages. Annuities are tough to undo, and payment amounts are usually written in stone. Should some unexpected financial emergency occur, those funds placed into the annuity are virtually inaccessible. It is possible to sell an annuity to a settlement funding company, but this process can be costly and require the services of a financial professional or an attorney. Therefore, the annuitant should have an emergency fund or some easy-to-access investments in case something unexpected comes up. Although the tax advantages are a great perk when it comes to annuities, it may be wiser from a tax-savings standpoint to go with another plan. By meeting with a tax professional, the retiree can make sure that they actually will save on taxes in the long run.

As with any investment or retirement plan, retirees need to do their research and be sure that the plan is what's right for them. People and their situations are unique which explains why there are so many options besides the single premium immediate annuity. It's best to talk with a financial professional, even if his counsel costs a small fee. The financial professional should specialize in retirement investing. This person can usually lead a retiree to a reputable insurance company that offers a sound plan. Those who prefer not to meet with a financial counselor can research online and discuss possibilities and interest rates with different insurance companies. Whether it's an immediate income annuity or some other retirement investment, it's important to select a company that has a solid, long-standing reputation of excellence in investing.

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