BEST Split Annuities: What is a split annuity

BEST Split Annuities: What is a split annuity

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What Is a Split-Annuity Strategy?

A split-annuity strategy involves purchasing two types of annuity contracts: immediate and deferred.

The immediate annuity would provide a current income stream during the early years of retirement, and the deferred annuity would have the potential to provide a future income stream.

In retirement, most people rely on a combination of Social Security, retirement plans, and personal savings for income. A split-annuity strategy can help supplement these income sources.

This is one way to add some stability to your financial future and may help ensure that you don’t outlive your assets.

The biggest problem for those who are approaching or have already reached retirement is striking a balance between the necessity to maintain their standard of living and their desire to leave as much money as they can for their loved ones. Finding this balance can be challenging, especially because retirement might last for decades.

A split annuity is one tactic to consider since it generates a present income stream while safeguarding money for the future.

Split Annuity Strategy

When financial markets turn volatile, some investors show their frustration by fleeing the markets in search of alternatives that are designed to offer stability.

For example, in the first quarter of 2020, the S&P 500 lost nearly 20% of its value, over $5 trillion, due to market volatility.

For those looking for a way off Wall Street’s roller-coaster ride, annuities may offer an attractive alternative.

Annuities are contracts with insurance companies. The contracts, which can be funded with either a lump sum or through regular payments, are designed as financial vehicles for retirement purposes.

In exchange for premiums, the insurance company agrees to make regular payments — either immediately or at some date in the future.

Meanwhile, the money used to fund the contract grows tax deferred. Unlike other tax-advantaged retirement programs, there are no contribution limits on annuities. And annuities can be used in very creative and effective ways.

The Annuity Split Strategy

One strategy combines two different annuities to generate income and rebuild principal.

Here’s how it works:

An investor simultaneously purchases a fixed–period immediate annuity and a single premium tax-deferred annuity, dividing capital between the two annuities in such a way that the combination is expected to produce tax-advantaged income for a set period and restore the original principal at the end of that time period.

Keep in mind that any withdrawals from the deferred annuity would be taxed as ordinary income.

When the immediate annuity contract ends, the process can be repeated using the funds from the deferred annuity (see example). Remember, the guarantees of an annuity contract depend on the issuing company’s claims-paying ability.

Diane Divides

Diane divides $300,000 between two annuities: a deferred annuity with a 10-year term and a hypothetical 5% return, and an immediate annuity with a 10-year term and a hypothetical 3% return. She places $182,148 in the deferred annuity and the remaining $117,852 in the immediate annuity. Over the next 10 years, the immediate annuity is expected to generate $1,117 per month in income, with a few dollars left at the end of the period. During the same time, the deferred annuity is projected to grow to $296,700 — effectively replacing her principal.


Other Uses of Split Annuity

Split annuities aren’t only used as part of a retirement plan. They are often used in structured settlements in which an individual comes into a large sum of money as the result of a personal injury award.

They can also be used for tax-benefit purposes where the investor wishes to defer paying taxes on a large sum of money.

Another use occurs when the investors want a regular income for a specific purpose, such as covering a monthly mortgage payment, while still preserving a portion of the principal.

Splitting assets among multiple products – or even among several planned holding period durations within the same product – may enhance your flexibility and certainty in addressing numerous financial needs amid life event risks you may encounter in the future.

Pros and Cons of Split Annuities

A split-funded annuity strategy can offer advantages and disadvantages and it’s important to consider both to help decide if it’s right for you.

On the pro side, here are some of the best reasons to consider a split annuity:

  • You can get immediate income to fund retirement or other goals
  • The deferred annuity will grow tax-deferred
  • Unlike a 401(k) or IRA, there are no contribution limits for annuities
  • Fixed annuities can provide a guaranteed rate of return

In terms of the cons, here are some of the potential drawbacks of split annuities:

  • Splitting funds means each annuity is smaller
  • Deferred annuities have more room to grow than immediate annuities
  • Surrender charges may apply if you decide to cancel one or both annuities


A split-annuity, which is a way of using annuities rather than a specific type of annuity, can kill two birds with one stone when generating income for retirement. It’s a strategy that uses both immediate and deferred annuities to fund your retirement income goals.

Before putting this strategy to work, it’s important to consider how well it fits your financial needs and goals.

Annuities Are the Safe Retirement Option

Annuities help people feel secure about their finances as they enter retirement. They’re the only insurance products that guarantee a stable retirement income stream for life.

If you’re looking for a way to supplement your retirement savings or social security payments in retirement, consider an annuity. There are several different types of annuities so it is important to compare all possible plans.

Split funding is one way to cover your bases so you get an income stream starting now while you also enjoy the benefits of a deferred annuity.

Keep in mind that split-funded annuities don’t earn as much money as deferred annuities.

Unless you really need the income, it’s usually better, in the long run, to opt for a deferred annuity.


The Split Annuity Can Help


With company pensions vanishing and the cost of living rising, you likely will have to rely on your own savings to provide most of your retirement income.

The split annuity concept can be a useful part of your retirement income plan by supplying fixed income while preserving funds for later use. If you have questions or need assistance, contact us:


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