When your ready to move forward, give Saggio Management Group a call so we discuss the specific tax implications for your situation.
The A, B, Cs and 1, 2, 3s of Annuities
Sep 24, 2010 5:20 PM EDT
"The Boomer" is a column written for adults nearing retirement age and those already in their "golden years." It will also promote reader interaction by posting e-mail responses and answering reader questions. E-mail your questions or topic ideas to email@example.com.
We've discussed the pros and cons of opting for annuities in your retirement planning. Earlier this month, the Labor and Treasury departments held a joint hearing to discuss the role, if any, that annuities should play in employer-offered 401(k) plans. Whether or not you think they make sense for your future, one thing is clear: We should have a general knowledge of the subject.
When speaking to an advisor about annuities, the different types alone -- variable, fixed, indexed, deferred, immediate - can be overwhelming.
Here's a simple breakdown on what you should know from Dana M. Pedersen, vice president of annuity product development at The Phoenix Companies, Inc.
No. 1: Immediate or deferred?
The two primary categories that people are most familiar with are the immediate and deferred categories.
An immediate annuity is appropriate for somebody who wants to begin receiving income immediately, so somebody who is into or just starting retirement. A deferred annuity is most appropriate for somebody who needs to accumulate assets on a tax-deferred basis -- in most cases for a specified period of time -- and then at some future date most likely will have an income stream. Deferred annuities in a lot of cases work best for somebody who would like to save or accumulate assets for a certain number of years and then start to take income out of the annuity.
No. 2: Variable or fixed? Traditional or index?
Once you decide on whether immediate or deferred is right for you, then you can get into choosing between a variable or a fixed annuity, and when you are talking about a fixed annuity you can further break that down to a traditional fixed or an index annuity.
Variable annuities are much more popular in the deferred form. In a variable annuity, the client amount by which a client's account value is going to accumulate or grow each year is going to be change, and it is going to vary based on the return of the sub accounts that the client were to elect. With a variable annuity, there is a little bit more risk, but a very simple level. The account value can go up and the account value can go down, all depending on the index the sub accounts are tied to.
With a fixed annuity, there is usually a specified rate of return, so when the client purchases the fixed annuity on the deferred side, he knows how much he is going to earn each year. With this, clients are going to have a credit very similar to a savings account at the bank where they know they are going to earn "X" percent per year on the fixed deferred annuity.
Then you get into the sub-category offerings of fixed index annuities. With an index annuity, basically the client is assured that they will never lose money. Here there is no potential for any type of investment loss, but there is the potential for some upside. This makes an index annuity most appropriate for people who really can't tolerate the risk of a variable annuity because they don't want to take any chance for loss of principal, but at the same time they want the potential for a little bit more upside than a guaranteed-rate fixed annuity would provide.
With an index annuity, the actual performance of the account value is a function of the performance of an outside index of some kind. For example, if your index annuity is based on the performance of the S&P 500, if the index is down significantly in a year, you would have no return. You wouldn't lose any money -- you would just have a flat account value, whereas if the S&P 500 was up in a particular year, your credited amount would be a function of some portion of the performance of the S&P 500.
No. 3: A, B, C, L or X?
When you get into variable-deferred annuities, that is where we see the widest product offering and a lot of the acronyms or abbreviations that are out there can sometimes be confusing to somebody that doesn't know exactly what these abbreviations mean.
Here we get into the categories of an A, B, C, L and/or X share. What the letter corresponds to for the most part is the length of the surrender charge period, so as long as you leave your money in for the length of the surrender charge period, you pay no penalties when you begin to withdraw. If the client has to withdraw money prior to the end of the end of the surrender charge, most annuities allow the client to take out at least 10% of the account value per year without any penalties. However if they have to take out an amount in excess of that they will pay a fee.