What are Single Premium Deferred Annuities (SPDAs)?

Single premium deferred annuities are powerful insurance products. They turn a lump sum of cash into a steady stream of retirement income. They’re like your typical deferred annuities, except that you fund SPDAs upfront in a single payment.

Then your money earns interest and grows over the annuity contract term—usually several years. When the term is over, you get the option to convert the annuity into regular income payments.

Those regular annuity payments give your financial future some certainty. They help you live out your golden years without stress. In fact, guaranteed retirement income is what draws many people to annuities in the first place.

In this article, we take a deep dive into SPDAs. We explain what they are, how they work, and their advantages and disadvantages.

How Single Premium Deferred Annuities Work

SDPAs are a lot like most other annuity contracts. They’re designed to eliminate the worry that you’ll run out of your retirement savings.

You can think of annuities as having two phases: an accumulation phase and a payout phase.

In the accumulation phase, you fund your annuity by paying your insurance company a "premium." The premium sits in your annuity account, earning interest and accumulating in value. When the annuity term ends, you can choose to annuitize, which begins the payout phase. In this phase, your premium plus earnings are paid back to you in a steady stream of income payments.

SDPAs differ from other types of annuities on two features: you pay a “single premium” and they are “deferred.”

Single premium means that you pay your annuity premium in one lump sum of money. It’s the opposite of a flexible premium annuity, which you fund in several payments over time.

Deferred annuities are annuities that grow over time and pay you later—often several years in the future. You can contrast them with immediate annuities, which start to pay you very back soon after you buy them.

SPDA Taxation

The money you put into an SDPA grows tax-deferred. That means you don’t pay income tax on earnings in the year you earn them.

Instead, you pay taxes on your earnings in the year you receive payments. What taxes you’ll owe depends on whether you have a qualified or non-qualified annuity. Check out our article on annuity taxation for more details on how annuities are taxed. And if you have any other questions, speak with a tax advisor.

SPDA Customization Options and Riders

Like most annuities, you can customize SPDAs with optional add-ons called riders.

For example, some companies may offer a guaranteed withdrawal benefit rider. This rider guarantees that the annuitant will receive all premiums paid, even if they chose a risky variable annuity and their investments perform poorly.

Another way you can customize your annuity is by choosing different payout options.

For example, you may choose between a single life annuity or a joint life annuity. A single life annuity provides annuity payments for the rest of the life of the annuitant. A joint life annuity provides payouts for the rest of the annuitant’s life and the life of their spouse.

These are only some of the customization options you may have when you buy a single premium deferred annuity.

Pros and Cons of Buying a Single Premium Deferred Annuity

So is an SPDA right for you?

It depends—they have some fantastic benefits, but also some important drawbacks. Check out the pros and cons of SPDAs to determine if they could be a good fit for your needs and please consult your financial advisor.

SPDA Pros

Some of the advantages of SPDAs include:

Minimum rate of return. If you buy a fixed SPDA, you receive a guaranteed rate of return over the term of the annuity. It’s a very safe way to put your cash to work for you. (Note that if you purchase a variable annuity, your rate of return is not guaranteed—more on that below).

Tax deferral. You don’t pay taxes on your earnings until you receive your annuity payments. That means that your annuity funds grow faster. Another benefit is that you get to wait until retirement before paying taxes. Most people have lower incomes in retirement, and they fall in a lower tax bracket. That’s why most people pay less tax overall when their taxes are deferred.

No contribution limits. 401(k)s and individual retirement accounts (IRAs) often have annual contribution limits. That's generally not the case with annuities—you can fund most SPDAs with as much money as you like.

Guaranteed income. SDPAs provide financial security because they offer guaranteed retirement income. (It’s guaranteed provided you keep your money in the annuity for the entire term). Your annuity isn’t FDIC insured like some bank accounts are, but it is backed by the financial strength of the life insurance company.

SPDA Cons

SPDAs also have some drawbacks. Here are some of the disadvantages of SPDAs:

Up-front cash. You fund your SPDA in a single lump-sum premium payment. That means you need to have a good chunk of cash saved up and ready to deposit. If you don’t have a large lump sum available to put into an annuity, an SPDA may not be the best option for you.

Illiquidity. Once you put your money in an SPDA, it’s not very accessible. You can take your money back out if you need to. But your early withdrawal might cost you. Some early withdrawals face stiff surrender charges and tax penalties. So SPDAs are best for those who are fairly confident they won’t need that money in the short term.

Fees. Some annuity companies charge high fees on their annuity products. At Canvas, we like to keep things simple and cost-effective for our clients. That’s why we are proud to offer our annuities with zero commissions, account charges, or fees. But always check your contract to make sure the fees don’t take you by surprise.

Fixed SPDAs vs. Variable SPDAs

The main characteristics of SPDAs are that you fund them in a single payment, and they accumulate earnings over time. But within SPDAs, you can choose between several different types.

For example, SPDAs are commonly sold as either fixed or variable annuities.

Fixed annuities have a guaranteed minimum interest rate. That means that the interest rate you receive will never fall below the stated minimum throughout the annuity term.

For example, Canvas Annuity offers a Future Fund with a 7-year term that has a guaranteed crediting rate of 3.25%. Over that 7-year term, the crediting rate will never fall below 3.25%. When you purchase this annuity from Canvas in a single upfront lump sum, you’re buying a single premium deferred annuity.

Variable annuities are annuities with variable interest rates. When you buy a variable annuity, your premiums are put into several sub-accounts with specified investment objectives. These work a little like mutual funds in that they invest in assets like bonds, stocks, and money market funds. Your interest rate increases or decreases depending on the performance of these assets.

Variable annuities are much riskier than fixed annuities because your interest rate is ultimately determined by stock market performance. If your investments perform badly, you can even lose money with this type of annuity.

SPDAs vs. Other Types of Annuities and Investments

SPDAs are just one type of annuity. Insurance companies like to offer many different annuity options to suit customers with different financial situations. Here are some SPDA alternatives:

Single Premium Immediate Annuities (SPIAs). An SPIA is like an SPDA—they’re both single premium annuities, meaning you buy each of them with a single premium. The difference is that the SPIA is an immediate annuity. Instead of accumulating interest over several years like a deferred annuity, it will start to pay you back soon after you buy it.

Multi-Year Guaranteed Annuities (MYGAs). An MYGA is a type of fixed annuity. Like an SPDA, it’s deferred, so your money earns interest and grows over a period of time. But unlike an SPDA, you don’t have to pay your entire premium all at once. Instead, you fund this annuity in installments over several years.

Certificates of Deposit (CDs). CDs aren’t annuities; they’re a type of investment. CDs are similar to fixed SPDAs in that they are very low-risk and they have a guaranteed interest rate over the term of the investment (provided you don’t take your money out early). But there are some big differences between them. For one thing, CDs typically aren’t tax-deferred. For another, CDs don’t pay retirement income, and they can’t offer lifetime income either. CDs are usually better for short- or medium-term investing. Annuities are better for long term investing.

Single Premium Deferred Annuities: The Bottom Line

Single premium deferred annuities are fantastic if you have a large nest egg of retirement savings lying around that you want to grow steadily (and safely!) over time. At the end of the term, you can annuitize and convert your savings into a steady stream of income.

You do need a large sum of capital on hand to fund SPDAs. That makes them ideal for those who have already accumulated quite a bit of retirement savings.

Want to know how much you can earn with an SPDA? Check out our annuity products and their interest rates. We’re proud to offer some of the highest crediting rates in the industry. And don’t be afraid to reach out to our licensed reps for any reason. They are happy to explain how annuities ease the stress of retirement planning.