Split annuities are very tax efficient and intelligent investment vehicles combining two different types of annuities. A single premium deferred annuity and a single premium immediate annuity. One annuity repays you a set sum of money each and every month over a specified period of time. The other annuity is left in place to grow on a fixed interest basis, with the goal being that by the time funds in your immediate annuity are depleted, the single premium deferred annuity will be restored to your original starting principal. This allows you to then restart the process with new prevailing interest rates. 

The "Split Annuity or Combination Annuities" concept is really very simple, you split the CD money between two annuities, one annuity provides an income and the other annuity that grows. The income is provided by a single premium immediate annuity ("SPIA") that generates the about the same (or more) after tax income as the CD while the deferred annuity, or growth, annuity will grow back to the same or a larger amount than the current CD. The advantages come from the tax savings of the annuities, because the income is mostly non-taxable return of principal and the growth annuity is tax-deferred and by reducing the taxes on US Social Security benefits.

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Let's say a widow aged 74, has a $100,000 CD and a $150,000 CD earning $7,500 (3%) annually, a pension and investments that pay her $38,000 and Social Security benefits of $20,500. Her taxable income last year was $38,500 and her marginal tax bracket was 25%. Included in her taxable income was $4,400 of her Social Security benefits. Let's see what we can do by introducing her to a split annuity.

Let's take $205,000 of the $250,000 CD's and invest it in a 5-year annuity and assume we can earn 4% over the next five years.  At a 4% annual interest rate, her will have $250,000 five years from now. The remaining $45,000 would be placed in a SPIA that will pay about $775 a month, or $9,300 a year. Since 96.77% of the payments represent return of principal, the taxable income will be only $300 a year. Getting rid of the $7,500 in taxable CD interest and lowering taxable Social Security benefits means she will save about $2,000 in taxes next year.

Here's the bottom line:

	CD	Annuities	Difference
Annual Income from Savings	$7,500	$9,300	+$1,800
Annual Taxable Earnings	$7,500	$300	-$7,200
Social Security Benefits Taxed	$4,500	$1,500	-$3,000
Income Taxes Paid	$6,055	$4,038	-$2,017
Income from Savings + Tax Savings	$7,500	$11,317	+$3,817
Amount of savings five years hence	$250,000	$250,000	$0

We've added about $3,800 to her income from savings, a boost of 50.1%, by reducing her taxes and giving her more money from the SPIA than from the bank CD. If she can earn more than 4% she'll have more money at the end of five years than when she started. You don't need fancy software to do this arithmetic, just have us run a SPIA quote to provide the same income that the CD is now yielding and invest the rest in a deferred annuity. The numbers will always work.

If you want to cover future periods, you can split the CD into a SPIA, 5-year annuity and 10-year annuity. When the SPIA runs out in five years, the second is annuitized to provide income for the next five-year period and then the third annuity is used. The arithmetic gets a little more complicated, but you can rest assured that we can lend you a helping hand. Using annuities in this fashion can guarantee a lifetime of tax-favored income that will out-perform a bank CD.

Five Annuity Payout Options

Life Income Annuity

Periodic Annuity payments for as long as the annuitant lives

Periodic Annuity payments for a guaranteed period (5, 10 or 20 years) or for the life of the annuitant, whichever is longer

Periodic Annuity payments during the joint lifetime of two annuitants. When one annuitant dies, the other will continue to receive payments for his or her lifetime

Periodic Annuity payments during the joint lifetime of two annuitants. The surviving annuitant will receive two-thirds of the annuity payment for his or her lifetime

Periodic Annuity payments guaranteed for a specific period (between 5 and 30 years) 

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