What it means
Investopedia explains that an immediate annuity turns a lump sum into fixed payments that begin at once. A deferred annuity grows the money for several years before payments start.
A split-funded design combines both, so income starts immediately while the remaining balance compounds tax-deferred. The design aims to give dependable income and protect the starting capital.
Investopedia gives the idea of dividing a nest egg between a 10-year immediate annuity and a 10-year deferred annuity. If the deferred part earns the assumed rate, it grows back to roughly the original sum at the end of the term.
The split is often uneven, with more going to the deferred side. The same sources warn about trade-offs.
Investor.gov notes that annuities are meant for long-term goals, and that withdrawing a lump sum early can bring surrender charges, taxes and tax penalties. Surrender charges often decline over several years.
Money put into either part is therefore not easy to reach. The result also depends on the assumed return.
A fixed deferred annuity states a credited rate, but a variable one carries market risk. Insurers' prices for immediate annuities differ, and fees, taxes and inflation reduce what the buyer keeps.
The simple figures below ignore them. Split funding suits a person who has just retired or is close to it, wants a regular check and wishes to keep the original capital intact.
It does not suit someone who may need the lump sum soon. Checking the insurer's strength and each contract's terms is part of the decision.
In practice
Real-world examples.
Example
A fictional retiree has 300,000 and wants 10 years of income. He puts 115,826 into a 10-year immediate annuity and 184,174 into a deferred annuity at 5%, which grows to 184,174 x 1.05 to the power of 10, or about 300,000. The immediate part pays about 1,229 a month for 10 years.
Example
A fictional retiree splits the same 300,000 evenly, 150,000 into each part. The deferred half grows at 5% to about 244,334 after 10 years, which is 55,666 less than the original 300,000, so the capital is not fully rebuilt. An even split pays more income but rebuilds less capital.
Example
The same 300,000 plan is run again with a deferred annuity that credits only 4%. To rebuild 300,000 in 10 years, the deferred part must be 300,000 / 1.04 to the power of 10, about 202,669, which leaves less for the immediate annuity, so the monthly income falls. A lower rate means a bigger deferred share and smaller income.
Formula
Calculation
Deferred share needed = Target amount / (1 + rate) ^ years. With 300,000 / 1.05 ^ 10 = 184,174.
Immediate share = Total - Deferred share. With 300,000 - 184,174 = 115,826.
Monthly income = Immediate share x r / (1 - (1 + r) ^ -n), where r is the monthly rate and n the months. With 115,826, r = 0.05 / 12 and n = 120, the payment is about 1,229. Real insurer payouts differ.
Check on the result: the deferred part grows by 300,000 - 184,174 = 115,826 over the term, which equals the amount spent on the immediate annuity. The income paid over the term is about 1,229 x 120 = 147,480, so under these simplified assumptions the buyer receives about 147,480 in income and still holds about 300,000 at the end. The extra amount over the 115,826 paid in comes from interest earned inside the immediate annuity.Case study
Seen in the real world.
This case study is fictional and illustrative. Hana, 66, in Auckland, retires with 300,000 in savings and a small pension. She wants a monthly check for 10 years but does not want to spend her capital. Her adviser shows her the split-funded idea.
About 39% of the money goes to an immediate annuity, and 61% goes to a deferred annuity at 5% so it grows back to about 300,000. The adviser also lists the risks, such as surrender charges, fees and the chance that the rate is lower. Hana keeps 40,000 in a bank account for emergencies, and applies the split to the remaining 260,000. She asks each insurer for its quote in writing and checks the credited rate guarantee period.
She finds that the monthly income is lower than she hoped. She goes ahead with a smaller plan. The lesson is that a split-funded annuity trades some income for capital, and the numbers depend on assumed rates that may not hold.
Watch out
Common mistakes.
- Assuming the deferred part will certainly grow back to the starting amount when the rate may be lower or not guaranteed.
- Putting in money that may be needed early, then paying surrender charges and taxes.
- Ignoring fees, taxes and inflation when comparing the monthly income with other options.
Questions
People also ask.
What is a split-funded annuity?
It is a lump sum divided between an immediate annuity that pays income now and a deferred annuity that grows for later.
Why is the split often uneven?
The deferred part must be large enough to grow back to the original sum, so it often gets the larger share.
Is the capital guaranteed to return?
Not automatically. It depends on the rate credited, the contract's terms and the insurer's ability to pay.
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