Single premium immediate annuity (SPIA): What it is, how it works

With a single premium immediate annuity (SPIA), you’ll use a lump sum of money to purchase your annuity and start receiving a stream of income right away.

Headshot of Tory Crowley

By

Tory CrowleyAssociate Editor & Licensed Life Insurance AgentTory Crowley is an associate life insurance and annuities editor and a licensed insurance agent at Policygenius. Previously, she worked directly with clients at Policygenius, advising nearly 3,000 of them on life insurance options. She has also worked at the Daily News and various nonprofit organizations.

Edited by

Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Published|5 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

A single premium immediate annuity (SPIA) is one of the simplest annuities you can get. You’ll make one payment to purchase the annuity from an insurance company, and then the insurer will start paying you an income from those funds right away. 

An SPIA can be a useful tool to help you manage a large sum of money, such as a retirement nest egg, an inheritance you receive, or even lottery winnings. You can use those funds to ensure that you have an income stream for multiple years or for the rest of your life.

Key takeaways

  • With a single premium immediate annuity (SPIA), you’ll purchase an annuity with one large payment, and then the annuity will start paying you an income right away. 

  • An SPIA is simple to set up, but if your needs change, it can be difficult to alter your annuity’s pay schedule or withdraw funds early. 

  • You should consider an SPIA if you have a large sum of money that you want to convert into a steady income.

What is a single premium immediate annuity (SPIA)?

A single premium immediate annuity (SPIA) is a contract between you and the insurance company that guarantees a stream of income in return for a lump-sum payment. You’ll purchase your annuity contract with a single premium payment and in exchange, the annuity will pay an income to you for a set amount of time. 

Learn more about other types of annuities 

How do SPIAs work?

There are unique features to consider before setting up an SPIA. 

  • You’ll make one payment to fund the annuity, and then start receiving an income from that payment within 12 months. 

  • You can arrange for your annuity to pay you an income for a set number of years, a specific amount, or to last the rest of your life. 

Premiums

Premiums are the payments you make to the insurance company to fund your contract. In the case of an SPIA, you’ll fund it with one large payment. You can use pre-tax dollars — such as from a 401(k) — or taxed dollars, like your savings.

Annuitization or payout phase

The annuitization period or payout phase is when your annuity starts paying you an income. With an SPIA, annuitization starts right away, so you’ll start receiving income payments within a year of purchasing your contract.

Your payout phase can last for a set number of years or the rest of your life, depending on the terms on your contract.

Learn more about immediate annuities

Fees & penalties

With an SPIA, if you need to withdraw money ahead of your pay schedule, you’ll likely pay a 10% fee on any funds you withdraw early. [1]

If you set up an SPIA, it’s important to remember that you’ll sacrifice liquidity in exchange for the income stream. If you think you might need to access some of the funds you’ve contributed to your contact in an emergency, some SPIAs allow you to exercise what is called a commutation right — you receive a lump-sum payment from your principal while still receiving the regular income payments set by your contract. 

Keep in mind that the amount withdrawn from your principal will reduce the amount of your remaining annuity income payments. If you want to have this option on your annuity, make sure to add a commutation rider to your annuity when you purchase it. 

This rider is usually free, but it’s not available on lifetime annuities, and there are caveats to ensure that the insurer doesn’t lose money by letting you withdraw your funds early. If your annuity has a guaranteed payout period (called “period certain,”) you can usually withdraw up to 90% of your remaining funds by exercising your commutation rights.

Guarantees & riders

Most SPIAs offer a guaranteed rate of return. If this is the case for your annuity, you’ll have peace of mind knowing that your payments are guaranteed. However, with a guaranteed rate of return, you’ll also give up the potential for aggressive growth through other, more ambitious investments.

If you’re risk-tolerant and interested in contract options that offer greater potential returns, you can consider an indexed or variable annuity instead.

One of the other potential downsides of having a guaranteed rate of return is the possibility that your income payments lose value over time due to inflation. You can add a feature to your annuity called the cost of living adjustment rider (COLA) to address that concern. This contract add-on increases the amount of your income payments by a certain percentage every year. 

A COLA rider “ensures that your income won’t be eaten away by unexpected inflation in the future,” says Jeremy Eppley, certified financial planner at Silverstone Financial

You can usually add a rider to your annuity contract for an extra fee. But in order to offset the cost of guarantees and riders, insurance companies usually charge additional fees, which, combined with administration fees, can significantly reduce the amount of your income payments.

Tax implications

People often set up annuities to maximize their tax benefits. You can purchase an SPIA with pre- or post-tax money. If you purchase your annuity with pre-tax funds, you’ll have to pay income tax on the payments you receive. 

Contracts funded with pre-tax dollars are called qualified annuities and come with contribution limits and distribution rules set by the IRS. Qualified annuities are usually held in retirement accounts like 401(k) plans and IRAs.

On the other hand, if you buy your annuity with post-tax funds, you won’t have to pay taxes again on the principal you paid. However, any growth you receive will be taxed as income. 

Contracts funded with after-tax dollars are called non-qualified annuities and don’t come with contribution limits. You can fund a non-qualified annuity with savings, the sale of a large asset, or even funds from a windfall.

What are the different types of SPIAs? 

The main difference between the different types of SPIAs is how long your income is guaranteed. 

  • Life only. The annuity will pay you for the rest of your life, no matter how long you live. When you die, payments will end. This can be a good fit for you if you don’t have any dependents who may need this money in your absence. 

  • Period certain. You’ll receive payments for the amount of time written into your annuity contract. If you outlive your annuity, payments will end while you’re still alive. And if you die before the end of this period, the rest of the money will be left to your chosen beneficiaries. 

  • Life with period certain. This type of SPIA pays you an income for the rest of your life, but if you die before a certain amount of time — the period — has passed, your beneficiary will receive the remaining amount of your guaranteed payments. 

Choosing which type of SPIA is best for you will depend largely on whether you need to leave behind any money from your annuity for your loved ones. 

What are the pros & cons of SPIAs? 

Like all annuities, SPIAs have advantages and disadvantages. To know if an SPIA is right for you, consider the pros and cons. 

Pros

  • Guaranteed income. With an SPIA, you’ll be able to set up a reliable income stream. You’ll know exactly how much your annuity will pay you, which can be especially helpful if you’re living on a fixed income. 

  • Possible tax benefits. You can set up your annuity to minimize the amount of taxes you pay, depending on if you purchase your annuity with pre-tax income. 

Cons

  • Low liquidity. With this type of annuity, you’ll receive a reliable income, but you’ll also give up access to the cash used to purchase it. If you need to withdraw a large sum of cash from the annuity ahead of schedule, you’ll likely pay costly fees. 

  • Lower rate of growth. While an SPIA is very reliable in terms of how much you can expect to be paid, most SPIAs are fixed annuities, and the money won’t be invested aggressively. Your annuity will grow at a low, yet reliable rate. 

What should you consider before buying an SPIA?

SPIAs are a unique annuity product. To determine if it’s the best for you, consider factors like your age, investment goals, and risk tolerance. 

Your age

You can purchase an SPIA at any age, although most people who have enough money saved to purchase one, and can benefit from the income provided, are people who are retired. The majority of people who purchase this type of annuity are age 65 and above. 

Your investment goals

SPIAs aren't the best financial tool to use if you have ambitious investment goals. With an SPIA, you’ll have a guaranteed rate of growth on your investment, but you’ll give up the chance to invest in higher risk investment accounts, which have greater growth potential.

Your risk tolerance

If you have a low risk tolerance, SPIAs are good for you. The money you use to purchase the annuity will have a guaranteed rate of growth, and you won’t lose any of your money. 

Who should consider an SPIA?

You should consider purchasing an SPIA if: 

  • You have a large sum of money and you need help managing it

  • You want to set up a reliable stream of income

  • You don’t want to wait to start receiving income payments from your annuity

  • Investment growth isn’t your main financial goal. 

Retirees are the most common purchasers of SPIAs because many of them usually meet these criteria. But SPIAs can be good for other people, too, especially if you have regular expenses that you want to cover. 

Explore other annuity options

References

dropdown arrow

Policygenius uses external sources, including government data, industry studies, and reputable news organizations to supplement proprietary marketplace data and internal expertise. Learn more about how we use and vet external sources as part of oureditorial standards.

  1. IRS

    . "

    Retirement topics: Exceptions to tax on early distributions

    ." Accessed May 10, 2024.

Author

Tory Crowley is an associate life insurance and annuities editor and a licensed insurance agent at Policygenius. Previously, she worked directly with clients at Policygenius, advising nearly 3,000 of them on life insurance options. She has also worked at the Daily News and various nonprofit organizations.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Questions about this page? Email us at .