Are you considering participating in an annuity? It could be a wise decision. An annuity can help you gain tax efficiency and can offer guaranteed* retirement income. Some annuities even offer protection against downside risk.
However, annuities aren’t for everyone. There are some aspects to annuities that may make them unsuitable for you. Below is a list of pros and cons associated with annuities. Review these items before committing to an annuity product. Also, be sure to discuss your retirement income needs and goals with your financial professional.
Tax-deferral. Many annuities offer a feature known as tax-deferral. Tax-deferral is also a common feature among qualified retirement plans, especially 401(k)s and IRAs. When an account is tax-deferred, all taxes on earnings are delayed until you take a withdrawal. That means your earnings could accumulate for years or even decades before you pay any taxes.
Protection against loss. Some annuities offer protection against downside risk. For example, a fixed deferred annuity pays a predetermined annual interest rate over a set period of time. When that period ends, the insurance company recalculates your interest rate. However, most fixed deferred annuities have a guaranteed* minimum interest rate. That means the worst you can do is the minimum rate that is specified in your contract.
There are also fixed indexed annuities**, in which the interest rate is tied to the performance of an underlying index. If the index performs well, you get more interest. If it performs poorly, you may receive less interest. These annuities also have guaranteed* minimums, so even if your index decreases in value, your contract performance won’t be any worse than the minimum rate.
Both types of annuities give you an opportunity to grow your assets without risking downside volatility.
Guaranteed* lifetime income. Are you concerned about having enough guaranteed* income in retirement? An annuity could help address that concern.
For instance, you may consider a single premium immediate annuity, also known as a SPIA. With a SPIA, you make a one-time premium payment into the annuity contract. The insurance company then converts that premium into a stream of guaranteed* payments. Your payment amount depends on a number of factors, such as your life expectancy, the amount of your premium, and current interest rates.
Another option is a fixed indexed annuity with a guaranteed* lifetime income benefit. This is an optional feature that gives you the ability to take guaranteed* withdrawals from your annuity contract. You can withdraw up to a certain percentage of your account value each year. You are then guaranteed* to withdraw that amount each year for the rest of your life, regardless of how your contract performs.
Liquidity. While annuities offer many benefits, they also come with one big consideration. An annuity may not be a good choice for you if there is a chance that you may need access to your funds. In many annuities there may be restrictions on how much money you can withdraw in a given year, if you are able to withdraw funds at all.
For instance, with a SPIA, you may lose access to all your funds after you make your premium payment. Remember, in a SPIA, you convert your premium into a guaranteed* stream of income. While you will receive your annuity payments, you will likely be unable to access any additional funds from your premium payment.
In a deferred annuity, on the other hand, you will likely have more liquidity, but you may still face penalties for excess withdrawals. Deferred annuities often have something called a surrender schedule, which is a schedule of penalties for withdrawals from the contract.
The penalties usually decrease over time and eventually disappear altogether. But, if you take a withdrawal before the surrender schedule ends, you will likely pay a penalty for that given year.
Some annuities offer a free withdrawal amount, which is a set percentage of your contract value you can withdraw each year without paying a penalty. Some annuities may also waive penalties for things like nursing home expenses or disability.
An annuity could be the right strategy for you. However, it’s important to consider whether or not you may need to access your funds for emergencies or unplanned expenses. If so, you might consider leaving a portion of your funds in an account offering greater levels of liquidity.
Think an annuity may be right for you? Talk to your financial professional. They can review your needs, goals and concerns with you and help you decide whether an annuity is the right strategy.
* Contract guarantees backed by the financial strength of the issuing insurance company.
** Fixed index annuities are insurance contracts that, depending on the contract, offer a guaranteed annual interest rate and earnings potential that is linked to participation in the growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and cap participation or returns in significant ways. Any guarantees are backed by the financial strength of the insurance company. Investors are cautioned to carefully review an index annuity for its features, costs, risk and how the variables are calculated.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
15509 – 2016/3/29