What Is a Single-Premium Deferred Annuity?

Younger people use deferred annuities to avoid taxation on the growth while their income is high.

An annuity can be immediate or deferred. You can make payments into an annuity or put all your money in at once. The way the insurance company funds the annuity often gives the annuity its name. They can be fixed, indexed or variable.

Immediate vs. Deferred Annuities

If you purchase an immediate annuity, you start taking payments right away. Those that purchase a deferred annuity intend to take payments later, or never take payments and allow the money to grow.

Single Premium

Most annuities allow you to invest whenever you want after the initial investment. Single premium annuities only allow the initial investment and no more.

Types

Single-premium deferred annuities can be fixed, variable or indexed. The type they are indicates the underlying funding for the annuity.

Single-Premium Deferred Fixed Annuities

In the single-premium deferred fixed annuity, the investor puts in a lump sum and doesn't take an income. The money grows from interest-bearing vehicles like a CD and the principal doesn't drop.

Variable and Indexed

The single-premium deferred annuity (SPDA) uses mutual funds to fund the growth. The principal increases and decreases with the type of investment. Indexed annuities have guaranteed the principal and a percentage of growth, but if the index it uses climbs, the investor gets a specified percentage of the growth instead of the guaranteed interest rate.

Considerations

You can use almost any annuity as a single-premium deferred annuity. You simply invest one time and wait to take an income. However, you can't invest more than once or take an immediate annuity with a single-premium deferred annuity.

References

• Knights of Columbus: Single Premium Deferred
• The Motley Fool: 3 Reasons to buy a variable annuity
• Annuity Glossary, Annuity Translator