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Why No One Should Purchase a Single Premium Immediate Annuity (SPIA)

What is a Single Premium Immediate Annuity (SPIA)?

Touted as a “pension you can buy for yourself” by annuity marketplace Blueprint Income, a single premium immediate annuity (SPIA) at first sounds like a tantalizing tool. After all, who hasn’t felt a twinge of jealousy when a schoolteacher or firefighter friend discusses their pension? Before we discuss the pitfalls of SPIAs, however, it is important to understand how they work.

As they near retirement, an individual or couple may choose to purchase a single premium immediate annuity. They give a lump sum (say, around $250,000) to an insurance company, and the insurance company gives them back a fixed monthly payout (say, around $1,300) for as long as they live. Annuity payments begin within one year of the premium payment, so only those very close to retirement purchase single premium immediate annuities—hence, the “immediacy” of the payout.

single premium immediate annuities

SPIAs: A Bad Choice for Retirees of Every Socioeconomic Status

Single premium immediate annuities are an all-around bad idea. They don’t make sense for people who already have enough retirement savings; they will be able to fund their retirement with savings and Social Security, as well as other elements like rental property income, if applicable. SPIAs also don’t make sense for people with little retirement savings. According to one online calculator, a 67-year-old woman who pays an initial lump sum of $100,000 would only receive $541 per month for the rest of her life. Thus, those with little retirement savings would likely not be able to afford a high enough initial payment to generate a large enough monthly payout. Rick Ferris of Forbes warns both the well-prepared and the ill-equipped not to buy SPIAs. What about individuals and couples in the middle, those who have retirement savings but not enough to live on? Single premium immediate annuities are often marketed to these people, but consumers should be aware of the various pitfalls of SPIAs.

When you purchase a single premium immediate annuity, the insurance company takes your lump sum and invests it—but you never see the fruits of those investments. Instead, the insurance company pockets the returns for themselves. You don’t see your initial payment grow through investing; instead you must spend additional money to purchase a so-called “inflation rider” to ensure that inflation doesn’t erode your payments.

The Best Interest of the Consumer?

This month, Lincoln Financial, which sold $3.58 billion worth of annuities in the first quarter of 2019 alone, launched Lincoln Insured Income Advisory, a commission-free single premium immediate annuity (SPIA). This comes after Lincoln Financial, the number four provider of annuities in the country, suspended the sale of some fee-based annuity products in New York in August 2019. What prompted the change?  The New York State Department of Financial Services’ Regulation 187 went into effect. The new provision requires insurance providers to act “in the best interest of the consumer” when selling annuities. The decision by Lincoln Financial to exit the market rather than comply with this fiduciary rule should provide a clue that insurance companies don’t have clients’ best interests in mind when they sell annuities. Single premium immediate annuities are a bad choice for retirees, as well as those preparing for retirement.

Questions? Call a Securities Attorney

If you believe you were placed in an unsuitable single premium immediate annuity (SPIA) or have questions about your retirement investment accounts, you may benefit from consulting a securities attorney. The experienced and knowledgeable securities attorneys of Fitapelli Kura stand ready to help retirees (as well as soon-to-be retirees). Call (877) 238-4175 or email info@fkesq.com for your free case consultation.