What Is a Split Annuity?

Annuities are financial products that are designed by insurance companies. Annuities guarantee an income to you for a set number of years or for your entire life. A split annuity is a financial concept where two annuities are used to guarantee an income to you without depleting your savings over time.


There are two annuities used in a split annuity arrangement. First, a deferred annuity is used to hold the bulk of your retirement savings. Second, an immediate annuity is purchased with a portion of the savings from the deferred annuity. The immediate annuity guarantees you an income for a set number of years or for your entire life. Most of your savings stays intact while you receive an income from the immediate annuity.


The significance of the split annuity arrangement is that while your immediate annuity is making payments to you, the deferred annuity continues to grow. The ratio of deferred annuity savings to immediate annuity income is such that a portion of your deferred annuity can continue to be converted to immediate annuity payments over time without substantially reducing your total savings. In other words, the deferred annuity replenishes your savings, while the immediate annuity provides an income to you.


The benefit of a split annuity arrangement is that you can guarantee an income to yourself and never run out of savings. Since only part of your deferred annuity is converted, you still have access to a lump sum of money if you need it in the event of an emergency.


The disadvantage to a split annuity arrangement is that you need a large savings for the plan to work. If your savings is too small, then you may not generate a sufficient income to live off of. The concept of a split annuity is also somewhat complex. If your financial adviser is not familiar with how to time the conversion of your deferred annuity, or what percentages will work given the annuity contracts you have, you may end up unintentionally depleting your deferred annuity account over time.


You have to take into consideration that, regardless of the size of your savings, your split annuity arrangement will produce less money than converting all of your deferred annuity. It will also not leave you with a savings that will increase over time. The deferred annuity savings will simply build back up to the original starting balance.