Annuity FYI Blog

According to “More 401(k) Sponsors Consider Annuities: Survey” from the National Underwriter Online News Service, the 401k annuity is becoming increasingly popular.  A recent survey from Watson Wyatt Worldwide Inc. shows that more and more employers are offering annuity products to employees participating in 401k programs.  Companies are looking to provide their employees with a steady stream of income after retirement and they are realizing that annuities are a great way to offer just that.

The U.S. Department of Labor is working to get employers to offer lifetime annuities or other comparable products in their defined contribution plans.  The WWW survey showed that 22% of employers with 401k plans offer annuity choices.  At least 10% more are considering adding the option for their employees.  The recent economic crisis forced many employees to hold off retiring because their 401k retirement accounts lost so much value.  Annuities are an investment vehicle that eliminates that risk of losing money in a bad economy so they are a great product from the employee’s standpoint.  The reason that employers were less apt to offer annuities in the past was a lack of employee demand and the administrative complexities.  Now that the 401k risks have been exposed, both employers and employees are looking for less-risky ways to use their 401k money for retirement.

In “Sun Life unit racks up $1B in variable annuity sales” from Tim McLaughlin of the Boston Business Journal, McLaughlin sums up Sun Life’s great quarter.  Sun Life Financial Inc.’s U.S. division is based in Wellesley, Mass.  Sales of their variable annuities in the third quarter were $1.08 billion, more than a 30 percent increase from the previous quarter.  While many insurers have cut back their variable annuity business, Sun Life was able to capture 3.5 percent of the market share.  The wirehouse distribution channel, advisers selling the products to their clients, is where the largest gains occurred.  Annuity sales from variable products doubled from the first three quarters of 2008 to the first three quarters of 2009.

From the 1888 Press Release “InsuranceAgents.com Publishes a Guide to Tax Deferred Annuity,” investors can see the basics and benefits of tax deferred annuities.  Tax deferred products may be the best annuities for you as an investor.  The products allow investors’ wealth to accumulate tax free, building a solid nest egg for their future.  Unlike other investments like stocks, bonds, mutual funds or CDs, annuities offer investors a guaranteed stream of lifetime income.

There are three different types of tax deferred annuities which are fixed, variable, and indexed.  A fixed annuity product guarantees the investors’ rate of return over time.  Variable annuities do not offer that guaranteed rate, but are subject to market changes and offer the possibility of higher rates of return over the time the account is accumulating.  Indexed annuities are like a combination of the first two types of tax deferred annuities.  The rate changes periodically based on the market indexes.  It is wise to speak with a financial professional to determine which type of tax deferred annuity is best for you.

In the Financial Times article “More providers offer post code annuities,” Josephine Cumbo describes the process of determining annuity rates based on Canadian post codes.  Insurance providers offer better annuity pricing to those living in less affluent areas going on the assumption that they will live shorter lives.  This also applies to investors that are smokers or have medical conditions hinting at a shorter life expectancy.  Canada Life is one company who has adopted this policy.  They offer annuity rates up to 7 percent lower to investors that live in a post code considered to have wealthy and healthy citizens.  Since annuity products pay a stream of income over one’s lifetime in exchange for a lump sum down payment, a longer life expectancy means more years receiving that income stream.

Three other companies who are already using this mapping system are Prudential, Aviva, and Legal & General.  All of the post code mapping systems are diligent about the financial breakdown.  They do not look at the whole city but break down their analysis on a street by street basis in some areas, realizing that there are financial differences within neighborhoods.  Variable and fixed annuity rates ranged anywhere from 3 to 7 percent in the city that was reviewed.  The poorest neighborhoods typically get annuity rates of around 3 percent more than the more affluent neighborhoods.  It is important to fill out the medical questionnaire associated with your annuity purchase for this reason.  Investors living in a wealthy neighborhood who have poor health will receive a higher rate because of the health issue.  Without properly completing the medical questions, that investor would be subject to the lower rates associated with the wealthy neighborhood.

“Locking in Future Income” by Leslie Scism of the Wall Street Journal explains both the benefits and drawbacks of variable annuities.  While they help to protect your savings from losses in the stock market, you do need to be aware of both the guarantees and the costs associated with variable annuities.  They are popular because most products offer a guaranteed minimum payment which is paid in a stream over time.  It is important to note that you cannot usually withdraw your money in a lump sum, making variable annuities best for people looking for income like that you’d get from a traditional pension.

Your savings are invested into tax-advantaged funds, whether from 401k annuities transferred into a variable annuity product or from another source.  From there you’ll have an account balance of the basic funds which incorporates both your initial investment and any gains that you have accrued.  You will also have a guaranteed minimum benefit base, which insurers usually re-calculate each year and from which they base your lifetime payments.  While it is hard to find the 10% minimum increases of the past, you can still find 5% or 6% offered for at least 10 years or until your first withdrawal.

The fees associated with variable annuities are usually around 3.5% and can turn some investors off from the products entirely.  It is important to weigh those fees with the benefits though, because sometimes your reward is much more than your costs.  Since the market has extreme highs and lows, many insurers point out that the high increase years more than make up for the fees you are paying and still allow for a significant increase in your base amount.  It is important to speak with a financial adviser about variable annuities, because if you are ready to retire, immediate annuities might be a better product for you.  The Wall Street Journal lists annuityfyi.com as one of the only websites to help investors compare annuity products.