Single Premium Deferred Annuity Explained

Just like with any other form of legal contract, one should fully understand the limitations and restrictions that are set by the agreement. In addition to being charged for non-compliance, there are instances when the whole contract would be invalidated once one of the parties fails to offer their side of the deal. For this reason, those who are planning to invest their money on single premium deferred annuity accounts should see to it that they full understand what they are getting into, before they invest even a single dollar. Here are a few things that you should know about premium accounts, and what you can do in order to get the most from the deal.

In a nutshell, a single premium deferred annuity account allows you to get a fixed rate of return when you put money into the annuity contract. Most people choose to invest in this type of account because they like the safety and guarantees offered with these types of contracts.  In addition to this, taxes are deferred until the client makes his first withdrawal.

If you are looking for a way to make your money grow in a low risk environment, and delay paying taxes for it until you need the money, then placing your money on this type of account may be the best thing for you.       

One downside in choosing to place your money in this type of investment would be having to wait for a certain amount of time before you would be allowed to access the money. Agreements of this nature set certain repercussions for those who make withdrawals before they are allowed to. Surrender charges are imposed for those who withdraw their money early. For this reason, those who wish to invest in deferred annuities are advised to do so strategically, in order to allow the right amount of time before they make their first withdrawal.  For this reason, those who are nearing the proper age of retirement are advised to consult a financial advisor to determine the most suitable option. Another potential risk to this type of investment is interest rate risk.  Since the rate of return is fixed and determined at the beginning of the contract, it is possible that while the investment is still in the surrender period interest rates may change.  The investor could be missing out on potentially higher returns elsewhere.  Many contracts that offer fixed interest rates do not account for an annual increase in the rate due to inflation, thus eroding the actual gain each year.  Before investing in this, or any, type of annuity contract, a potential investor should seek the advice of a professional to fully understand all aspects and risks of this type of investment.

Annuities are best suited for long term investors.  Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax.  Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time.  Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.