While the SPDA market focuses on individuals with lump sums of existing money, the FPDA id designed for "new money" — men and women with longer-term wealth accumulation or retirement planning needs that they want to meet by periodically investing smaller sums over time. FPDAs are a great retirement planning tool for people ages 25 and up who are able to invest on a regular basis.

Prior to 1986, deferred annuities were commonly used to informally fund non-qualified deferred compensation plans. Due to the Tax Reform Act of 1986, however, annuity contracts owned by "non-natural persons," such as corporations, no longer receive tax-deferred treatment. While annuity interest is currently taxed to corporations, FPDAs still offer the advantages of safety and guarantees, competitive interest rates, and income option flexibility in funding deferred compensation plans.

The Single Premium Immediate Annuity Market

The SPIA market consists primarily of individuals preparing to retire who need to supplement their income from Social Security and qualified retirement plans. These people have been saving and investing to prepare for retirement and now need to convert the sum into income they cannot outlive.

The Split-Funded Annuity Market

The split funded annuity approach combines the advantages of a Single Premium Immediate Annuity (SPIA) with those provided by a Single Premium Deferred Annuity (SPDA) for someone who needs to receive income from a lump sum. Typically, split funded annuity prospects are individuals who are currently receiving income from a CD — income that is being fully taxed.

The best way to explain a split-funded annuity is to provide an example. Let's suppose that you have a client with $100,000 who needs to receive income from that money. Your client is considering placing the $100,000 in a CD that guarantees 7% interest for five years, or $7,000 a year to your client. Because your client is in a 28% tax bracket, the net income from the CD after tax is only $5,040. If you propose a split-funded annuity, your client's net after-tax income could increase by as much as 25% to $6,324! In addition, your client could still have the original $100,000 available after five years, just as with the CD. Let's see how this works:

1. Say your client buys a $28,700 SPIA providing annual income of $6,544 for a specified five-year period. Unlike a CD, only a portion of this income is taxable. Calculating the exclusion ratio, we determine that 88% of each payment is a tax-free return of principal. This means only $785 is taxable, leaving your client in a 28% tax bracket with $6,324 in net after-tax income, compared to $5,040 net after-tax from the CD.
2. The balance of the $100,000 — $71,300 — is placed in a SPDA earning 7%. The SPDA grows on a tax-deferred basis and is worth the original $100,000 at the end of the five years. The split-funded approach could again be used for another period of time. Keep in mind that, in this event, a greater portion of the annuity income will be taxable, since a portion of the $100,000 now represents tax-deferred growth.