For many people, the main attraction of an annuity may be that it lets them have guaranteed payments in the future when they expect to be in a lower tax bracket than they are now. With a classic tax-deferred annuity, your money compounds without taxes until you truly need it. But in some circumstances, another kind of annuity--a single-premium immediate annuity (SPIA)--may be a better alternative. As the name implies, the provider, which usually is an insurance company, begins cash payments to you right away. That could be a plus if you've already retired or expect to retire in the near future.
When you purchase a SPIA, you're generally counting on a continuous stream of income that can help pay monthly bills or other costs during your retirement. You simply give the insurance company that single premium and then sit back and wait for the checks to roll in. Typically, they will start arriving within a month.
Depending on the option you select, the money will keep coming either for a specified term or for the rest of your life. A SPIA often is viewed as a complement to investment income, distributions from employer retirement plans and IRAs, and Social Security benefits that can help sustain you throughout your retirement years.
How do you choose a SPIA? There are numerous factors to consider. Naturally, you'll be looking for a favorable interest rate. Once you decide on the payout option, it will be easier to compare the available rates that different annuities offer. Keep in mind, too, that your payments will depend not only on the amount of your premium but also how long the flow of cash will continue. All other things being equal, the longer the time for payments, the less you'll receive with each check. In other words, you will pocket larger monthly payments if you arrange to receive payments for 10 years than if you opt to get monthly payments over your lifetime (assuming your life expectancy is greater than 10 years).
But you also should compare other aspects of SPIAs, including the ability of the insurer to make good on its promise to pay future benefits. Check thoroughly into the financial strength of the company before making a commitment. One potential way of defraying such risks is to diversify your investments, buying annuities from two or more highly rated insurance companies.
Finally, don't forget about the tax consequences. In essence, tax is due on a portion of the payments in the year the payments are received, and that could require some tax bracket management on your part. For instance, if you're currently in your peak-earning years and expect that your top tax bracket will be lower in the future, a tax-deferred annuity might be a better option. We can provide guidance for your personal situation.
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