Annuity FYI Visitor Blog

The Obama administration is a big fan of annuities, according to “The unloved annuity gets a big hug from the president,” by Ron Leiber of The Boston Globe.  While President Obama did not end up discussing annuities in his State of the Union address last week, they are widely discussed in a report from his Middle Class Task Force.  Obama’s administration is promoting annuities as a vehicle to help Americans obtain a secure retirement.  In exchange for a lump sum of money at purchase, investors will receive a monthly income check for the rest of their lives.  Annuities are one of the few products to counter the longevity risk, running out of money while you are living.

The investors who were previously fearful of the risks of annuities may just take a second look at this unique product.  An immediate fixed annuity is the simplest form and the least “risky” from many viewpoints.  Variable annuities were derived from them and have their own risks and rewards.  Maybe the biggest fear investors had was losing the money if they died unexpectedly.  There are options available to add a spouse or other loved one onto your annuity to receive payments for a specified period of time if you die.  Inflation was another risk that worried investors, but with the option to purchase an annuity that rises with the consumer price index, you can avoid that as well.  President Obama may be issuing tax incentives for investors to purchase annuities for retirement along with requiring plan administrators to show employees the monthly payments they could receive with annuities to help promote them even more.

In “AXA Equitable Launches Variable Annuity With Dual-Account Investment Platform,” a staff reporter at Insurance Business Review describes AXA’s new product.  AXA Equitable Life Insurance Company says that their new variable annuity gives a greater selection of investment portfolios and protection from the downside.  Variable annuities across the market are changing after losing steam in the recent financial crisis.  Retirement Cornerstone is their new dual-account investment platform.  It is a tax-deferred platform supporting two accounts that are interactive.  The first focuses on maximizing the performance of your investments by using money managers.  The second account is optional and simply focuses on retirement protection.

The account focused on long-term accumulation gives the choice of over 90 different investment portfolios with different investment styles and asset classes.  The account with downside-protection has a guaranteed income benefit option which invests in index portfolios and asset allocation.  The Retirement Cornerstone has what AXA believes to be one of the best annuity rates available for similar products.  Their roll-up rate is one point higher than the 10-year treasury rate average and is updated annually.  The dual-account platform has many tax benefits including tax-free transfers among portfolios which helps investors build lifetime income and respond to changes in economic conditions.  AXA believes that their new annuity product is a unique response to the past market turmoil which allows investors to build up their cash and protect it in the future.

“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.

No-load annuities are annuity products where investors are not charged commission fees because the investor controls the account.  During this tough economic climate there is an increased interest in these no load annuities.  Annuity FYI has added a section on these no-load variable annuities to the Compare Annuities section on its website explaining the product and listing the most competitive options out there for investors.  No-load variable annuities are usually sold to investors directly but can sometimes be purchased through brokers as well.  There are some fees associated with the product, but those fees are significantly less than load annuities and some load annuity fees are nonexistent with the no-load annuities.

One benefit that investors really like about no-load annuities is that they do not have surrender charges if you need to withdraw some money unexpectedly.  Of course you can still have penalties associated with the age you withdraw and tax gains.  The best no-load annuities have the same Guaranteed Income Benefit and Death Benefit options as loaded annuities.  One of Annuity FYI’s favorite products right now is Ohio National’s ONcore Wrap No Load Annuity.  It has both of those riders included.  No-load annuities are not right for every investor.  Since you are not paying commission to a broker, you are not getting the one on one advice and support associated with loaded annuities.  The products are best for investors that know how to monitor their own annuities and choose to do that in order to lower fees.

In Business Wire’s article “Putnam CEO Reynolds Calls for 2010 to Be the Year of Retirement Reform, with a ‘New Generation’ of Workplace Savings Plans,” Reynolds ideas for the future of retirement plans is highlighted.  Robert L. Reynolds is the President and CEO of Putnam Investments.  He hopes that following 2009’s year of healthcare reform, 2010 will be the year for retirement reform.  Annuities and other similar products that have lifetime guaranteed income should be incorporated into this “new generation” of retirement plans.

By 2020, Reynolds thinks that the market for annuities and other assured income products could reach $5.5 trillion.  The current estimate for variable and fixed annuity products by the Insured Retirement Institute is $1.7 trillion so this would be a significant increase over the next decade.  His proposed reforms call for insurance and mutual fund companies, sponsors of retirement plans, advisers, and the government to work together creating a new retirement marketplace.

In order to ensure that Reynolds’ idea of making assured income products like annuities a large part of retirement plans, he calls for some government reforms to help the process along.  A national insurance charter would consistently regulate all assured income products and a new regulatory agency tentatively named LISA (Lifetime Income Security Agency) would approve all assured income offerings.  A national insurance pool funded by the industry to secure annuity funds would be developed to mimic the FDIC bank protection.  Reynolds would also like it to be mandatory for workplace plans to offer annuities and other assured products and offer government tax incentives for plan participants to choose these offerings.  It’s a tall order, but could drastically change the face of retirement for the next generation.