What it means
Investopedia describes an SPDA as an annuity set up with one lump-sum payment to an insurance company. The balance grows during the accumulation phase, and income payments start later, in the annuitization phase.
It can be fixed or variable, and it suits a person who has the cash to fund the premium up front and wants a stream of income that cannot be outlived. The key trade-off is access.
The SEC's investor glossary says an annuity is a contract with an insurance company meant for retirement and other long-term goals. Withdrawing a lump sum may bring surrender charges, taxes and tax penalties.
Investor.gov explains that a surrender charge often declines over several years. Its example is 7% in the first year, 6% in the second and 5% in the third, and it adds that the charge typically ends after six to eight years, and sometimes ten.
Because an SPDA has one premium, there is usually one surrender schedule, which is simple to read. Tax matters too.
Under US tax law, section 72(q) of the Internal Revenue Code adds a 10% additional tax on the taxable part of an annuity payout made before certain events, such as reaching age 59 and a half, with listed exceptions. Growth is taxed at ordinary income rates when it comes out, not at capital gains rates, and other countries tax annuities differently, so local rules decide.
A fixed SPDA credits a stated rate for a guaranteed period, so the buyer can see the future value. A variable SPDA depends on investment performance and carries market risk.
Because the insurer's promise backs a fixed annuity, the strength of the insurer also matters. Before buying, a prospective owner should read the full contract rather than a sales summary.
Check whether the credited rate is guaranteed for the whole term or only the first year, what the surrender schedule is, and whether any penalty-free withdrawals are allowed.
In practice
Real-world examples.
Example
A fictional buyer puts $100,000 into a fixed SPDA that credits 4% a year for five years. The value is $100,000 x 1.04 to the power of 5, which is about $121,665. The gain over five years is $21,665, or 21.7%.
Example
The same buyer withdraws $50,000 in year 1, when the surrender charge is 7%, so the charge is $3,500. The contract value after one year was $104,000, so the taxable gain is the $4,000 earned. If the buyer is under age 59 and a half, the 10% additional tax on $4,000 is $400.
Example
Another fictional buyer compares the 4% contract with one that credits 3% a year. After five years, $100,000 grows to about $115,927 at 3%, which is $5,738 less than the $121,665 at 4%. The higher rate looks better, but only if the buyer will not need the money before the surrender period ends.
Formula
Calculation
Fixed SPDA value = Premium x (1 + credited rate) ^ years. With $100,000 at 4% for 5 years, the value is $100,000 x 1.04^5 = $121,665.
Surrender charge = Withdrawal x surrender rate. With $50,000 x 7% = $3,500.
Additional tax = Taxable amount x 10%. With $4,000 x 10% = $400.
Taken together, a buyer who withdraws $50,000 in year 1 loses $3,500 to the surrender charge and, if under the qualifying age, $400 to the additional tax, a total of $3,900 before any ordinary income tax on the $4,000 gain.Case study
Seen in the real world.
This case study is fictional and illustrative. Marta, 58, receives a $150,000 inheritance and thinks about putting it in an SPDA. A seller says the 5% rate is guaranteed. She asks for the full contract.
The contract shows that the 5% rate is only for the first year. After that the insurer may reset the rate. It also shows a seven-year surrender schedule, starting at 7% and falling by one point a year. Marta also notes that she will need part of the money in three years for a home repair.
She keeps $50,000 in a bank account and puts $100,000 into the SPDA. That way a withdrawal in an emergency will not hit her surrender charges. She compares two insurers and checks their financial strength. Her choice rests on the contract terms and her timing, not on the headline rate.
Watch out
Common mistakes.
- Treating a first-year rate as if it were guaranteed for the whole contract.
- Putting in money that may be needed before the surrender period ends.
- Ignoring the tax on gains and the 10% additional tax on early withdrawals.
Questions
People also ask.
What is a single-premium deferred annuity?
It is an annuity bought with one lump sum, whose value grows tax-deferred until income starts or the money is withdrawn.
How is it different from a flexible-premium annuity?
An SPDA takes one payment. A flexible-premium contract accepts more payments after the first.
What happens if I take the money out early?
You may owe surrender charges and tax on the gain. Under US law there may also be a 10% additional tax if you are younger than age 59 and a half.
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