Single Premium Immediate Annuities (SPIA)
by Paul M. League, QFP — QUALIFIED FINANCIAL PLANNER

A Single Premium Immediate Annuity, or “SPIA”, is a contract whereby one pays a lump sum of money over to an Insurance Company in exchange for a guaranteed stream of immediate income for either ones lifetime, or for a specified number of years (i.e. life with a “period certain”). Should the annuitant/owner die before the end of that “period certain” his/her designated beneficiary would receive either the same income stream, or their lump sum cash equivalent, for the remainder of the period certain time frame.

There are two basic types of Income Annuities, Fixed or Fixed with an Inflation Rider, and as such there are also two basic income options; namely, either a “fixed” income amount that does not adjust for inflation, or an inflation adjusted one where the first payment is based on the life expectancy of the annuitant, plus an assumed interest rate (a kind of “base rate” used to determine the initial income payment, of typically around 3-4%), with adjustments to the income payment throughout the payout phase of the annuity.

Whether or not an Annuity is the right financial instrument for you, or whether it should instead make up only a portion of your total financial portfolio, depends on many factors. In the case of most Immediate Annuities” (SPIAs), it is important to note that once these are purchased they are also considered immediately “annuitized” (i.e. you begin receiving payouts). Insurers take the position that you have traded your rights to any control or access over the invested principle and cash accumulations, in exchange for their management and delivery of the income guarantees for your lifetime, or less, depending on the income payout option you selected at the time of acquisition.

SPECIAL ADVANTAGES of SPIAs:

  • Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return that are in addition to your benefits. No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules.

    The “SST” (Social Security Tax) is levied as you exceed a specified “threshold income”, which includes income from any and each of the following sources EVEN if you don’t take a distribution from these sources. However, SPIA income is exempt and is not among any of the following assets:

    • CD’s

    • Capital Gains

    • Credit Union Savings

    • Mortgage Rental Income

    • Passbook Savings

    • Pension Income

    • US Treasuries

    • Taxable Income sources

    • Etc.

    If your threshold income exceeds the following limits, up to 85% of the amount received from Social Security could be subject to tax based upon current tax law:

    Total Income Including Social Security

    % of Social Security that is Taxable (2014)*
    Single

    $25,000 – $34,000

    50% on Excess over $25,000, and under $34,000

    Over $34,000

    85% on Excess above $34,000
    Married Filing Jointly

    $32,000 – $44,000

    50% on Excess over $32,000, and under $44,000

    Over $44,000

    85% on Excess above $44,000

    (*See Social Security Website: http://www.ssa.gov/planners/taxes.htm)

  • The taxes on the income from a SPIA are reduced because of what is called the “Exclusion Ratio” i.e., excluded from the SPIA income one receives is a portion of the funds considered a return of principal (the money deposited to initially purchase or acquire the SPIA), which is not taxable.

  • More importantly, SPIAs best address the longevity problem with their guaranteed lifetime payouts and mortality crediting (you cannot outlive the SPIA income). NOTE: It is best, therefore, to use a SPIA to meet your fixed monthly expense & entertainment needs, on the lifetime guaranteed basis that only a SPIA provides, and to use other investment vehicles for increasing other available assets.

Annuities are as varied as the companies issuing them; therefore, be certain to seek the guidance of an informed Advisor prior to purchase.

Disclaimer: The material discussed herein is meant for general illustration or informational purposes only and is not to be construed as investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary; therefore, the information contained herein should be relied upon only when coordinated with individual professional advice. We are not licensed for and therefore do not provide tax or legal advice. (Last updated July 2012).

About the Author: Paul M. League, QFP — QUALIFIED FINANCIAL PLANNER, is the Founding Principal of League Financial & Insurance Services (www.LeagueFinancial.com), which is a privately held company, established in 1984, and located in Palm Desert, CA. Paul and his company specialize in assisting clients to create, expand & preserve assets “…in a league of our own.” Contact Information: Paul M. League, P.O. Box 11800, Palm Desert, CA 92255-1800; 800.482.5347; Info@LeagueFinancial.com. © Paul M. League. All rights reserved.

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