Single Premium immediate Annuities

Annuity providers tout Single Premium Immediate Annuities (SPIAs) as the solution to longevity risk. You can exchange a portion of your retirement savings for guaranteed lifetime income. When you have to give up something in exchange for something else, it is always important to assess the value you are getting from it. What value are you getting from a SPIA? You can determine this by assessing the pros and cons of using SPIAs in retirement.

== PROS ==

– Reduced market risk

SPIAs are financially secure retirement products. They belong to the “income options” group in a diversified retirement portfolio. In addition to the low risk that the SPIA inherits as an income option, there are guarantees offered because they are annuity products. Single Premium Immediate Annuities offer retirement income protection and insulate the annuity investor from market losses as well.

– Guaranteed lifetime income

The benefit of lifetime income is having a consistent and reliable stream of income until you pass away.

– Annuity settlement options

SPIAs have annuity settlement options that allow the annuitant to provide for dependent beneficiaries. Since some retirees still have financial obligations to loved ones, SPIAs can ensure that they have income to cover their contingent beneficiaries/dependents in the event of the retiree’s death.
– Potential for reduced tax liability

While income from deferred annuities is taxed after maturity, the proceeds from a SPIA do not form part of your chargeable income. Therefore, if your chargeable income is high, you can reduce your liability by using a SPIA in retirement.

– Manage your estate taxes

Immediate annuities are a great way to manage your estate value for tax purposes. Retirees can use SPIAs to maintain the value of their estate below the tax threshold (varies among states and countries).

== CONS ==

– High opportunity cost

Once you exchange your lump sum for income, you give up that lump sum and all the other things that you could have done with it. You could have purchased real estate, invested your savings at a higher rate or anything else you pleased. Purchasing a SPIA is not a reversible decision, making its opportunity cost higher and permanent.

– Decreased liquidity

You use cash to purchase an annuity (cash in the sense of anything that could be easily converted to cash as well). Therefore, SPIAs automatically decrease your liquidity, which can be an issue if you have an immediate demand for large sums of cash to cover health costs or other contingent expenses.


– Longevity risk

While SPIAs are supposed to decreased longevity risk, you can still live in poverty on guaranteed income, especially if that income is not sufficient. The insurer’s annuitization rates and other benefits should be considered to determine whether you are getting good value for the flexibility, liquidity and opportunity you are giving up with your lump sum. A SPIA can help you to reduce longevity risk, but that is no guarantee.

– Rate of return

SPIAs sometimes offer rates of return that are on par or above what you would get from other income options. However, this varies from insurer to insurer. A low annuitization rate (rate of return) would not be a benefit to you. Therefore, it is important to get higher payout rates for your annuity.

Single Premium Immediate Annuities can be very useful. However, their effectiveness and utility depends on your circumstances, the particular terms and conditions of the contract and prevailing market conditions.