Immediate Payment Annuity (Single-Premium Immediate Annuity — SPIA)
What it is
An immediate payment annuity is a contract with an insurance company in which you pay a lump sum and begin receiving guaranteed income almost immediately—typically within a month. It’s also called a single‑premium immediate annuity (SPIA), income annuity, or simply an immediate annuity.
Explore More Resources
Key takeaways
- Provides a predictable income stream shortly after purchase (monthly, quarterly, or annually).
- Payments are usually fixed for the contract term, though variable and inflation‑adjusted versions exist.
- Commonly used to supplement retirement income (e.g., Social Security).
- Irrevocable once purchased and generally illiquid; surrender or cash-out options are limited and costly.
How it works
- You pay a single lump sum to an insurer.
- The insurer calculates periodic payments based on factors such as your age, prevailing interest rates, and the payment duration.
- Payments begin soon after purchase and continue according to the contract (for life or for a specified period).
Payment frequency (mode) is chosen at purchase—monthly is most common but quarterly or annual options are available.
Types and variations
- Fixed immediate annuity: Payments remain the same for the term of the contract.
- Immediate variable annuity: Payments fluctuate with the performance of an underlying investment portfolio.
- Inflation‑protected (inflation‑indexed) annuity: Payments increase to help maintain purchasing power.
- Joint and survivor annuity: Continues payments to a second person after the primary annuitant dies.
- Period‑certain or cash‑refund annuity: Guarantees payments for a minimum period or refunds remaining principal to beneficiaries if the annuitant dies early. These guarantees typically reduce the periodic payment and may cost extra.
Benefits
- Predictable, guaranteed income stream that can cover regular expenses or supplement other retirement income.
- Longevity protection: if you live longer than expected, total payouts may exceed the initial premium.
Risks and special considerations
- Longevity gamble: If you die shortly after purchase, you may not recover the premium unless the contract includes survivor, period‑certain, or refund provisions (which lower payments).
- Irrevocable and illiquid: Most immediate annuities cannot be canceled for a refund and generally cannot be cashed out without steep surrender charges.
- Fees and structure: Some annuities have high fees or complex features that reduce net income.
- Opportunity cost: Money used to buy an annuity is not available for other investments or emergencies—maintain an emergency fund before purchasing.
Taxes
- Qualified annuities (funded with pre‑tax dollars): Withdrawals are fully taxed as ordinary income.
- Nonqualified annuities (funded with after‑tax dollars): Only the earnings portion of payments is taxable; return of principal is tax‑free.
Tax treatment depends on how the annuity was funded—check with a tax advisor.
When to consider an immediate annuity
- You want steady, predictable income soon after retirement.
- You seek to reduce longevity risk and ensure basic expenses are covered.
- You have sufficient liquid savings for emergencies and do not need access to the entire lump sum.
Bottom line
An immediate payment annuity converts a lump sum into a near‑term guaranteed income stream, offering stability and potential longevity protection. However, it reduces liquidity and can be costly to reverse, so evaluate contract features (payment guarantees, survivor benefits, inflation protection), tax implications, and your overall financial needs before buying.