Fixed Annuities: Lifetime Benefits Have Sizzle But Don’t Let Other Benefits Fizzle!
Posted by DAI Life Brokerage Services on February 18, 2012 · Comments Off on Fixed Annuities: Lifetime Benefits Have Sizzle But Don’t Let Other Benefits Fizzle!
On January 1, 2012, somewhere in the world the first New Year baby of 1946 turned 66 and the proverbial baby boomer retirement flood gate opened.
The oldest baby boomers will be at what the Social Security Administration considers “full retirement age” in 2012. At this stage of their life they need to protect the nest eggs they have built for retirement. Many will need to reduce their risk, avoid losing money and gradually increase a portion of their nest eggs in safer investments to meet their everyday spending needs and/or health changes.
These baby boomers are setting the stage for those of us who follow. While fewer employers offer traditional defined benefit pension plans and Social Security may provide retirees with some income, most will not be able to depend on it to supply all of their retirement needs. They, like those who follow them, must be more responsible for their retirement than any generation before.
These boomers are facing their golden years with more economic uncertainty than they have ever seen. The combination of low inflation, record low bank rates, volatile markets and low U.S. Treasuries are making retirement dreams feel like a nightmare. It’s not surprising that those of us in the financial services profession are looking for even more ways to help our clients than we have in the past.
Enter Fixed Annuities and Lifetime Income Riders Let’s start with why baby boomers should buy annuities.
1. Annuities provide income to supplement what is received from Social Security, pension plans and other employer-sponsored retirement plans.
2. Annuities are a product that can provide funds to pay for long term care or other health care issues.
3. Annuities can provide a legacy to heirs or for purposes of a charitable gift.
4. Annuities can offer an income stream for life.
5. Annuity funds grow on a tax-deferred basis (we’ll come back to this later).
Considering what we know about the baby boomers who begin turning 66 in 2012, the current economy, and all of the other issues previously mentioned, it is no wonder that lifetime income riders came onto the scene and gained momentum. Let’s just take a look at what these riders offer: • Option to elect lifetime income withdrawals to generate a stream of income that can never be outlived.
• Flexibility and choices that provide control over when and how much retirement income is received.
• Some provide the ability to increase income withdrawal percentages if confinement to a qualified care facility occurs.
• Many provide for an automatic step-up provision, spousal continuation at death or payment in a lump sum to non-spousal beneficiaries.
Let’s face it, lifetime benefits bring sizzle to a product that may be difficult to sell in a low-interest-rate environment. They definitely serve a purpose—for the right client with the right objectives and situation.
Here’s my concern, though: They are not the only sizzle to an annuity sale. The fact remains, annuity products have many benefits and reasons why the right clients should buy one.
By now we have all probably read endless newspaper articles, reports, etc., on our economy and where it is going, how long it will take to recover, etc. This topic has definitely received a lot of press time, and rightfully so. I don’t have any statistics to support this, but my assumption is just as much (if not more) press time is spent on the topic of our U.S. deficit and the tax implications.
While we may not know what the future holds, we do have tax deferral on annuities today. That benefit should never be overlooked or take a back seat.
For federal tax purposes an annuity is classified as either qualified or nonqualified.
• A qualified annuity is purchased as part of or in conjunction with an employer-provided retirement plan or an individual retirement plan.
• Contributions made to a qualified annuity may be deductible (partially or wholly) from the taxable income of the entity making the contributions (individual or employer) when certain requirements are met.
• A nonqualified annuity is paid for with after-tax dollars and is not deductible from gross income for income tax purposes.
• Nonqualified annuities are not subject to required minimum distributions (RMDs).
• At time of withdrawal the current income tax rate is used (typically older age clients with lower tax brackets than during their working years).
• Tax-free 1035 exchanges are allowed.
• The Pension Protection Act of 2006, adopted in 2010, provides for investment gains in a nonqualified annuity to be withdrawn tax-free to purchase long term care insurance.
• Money accumulates in an annuity tax-deferred just like home value assets, IRAs, U.S. Savings Bonds and retirement plans, which means typically faster than if they were taxed annually.
A quick Google search on 2012 tax changes can prove to be overwhelming. I don’t know about you, but I have not talked with anyone who believes taxes will go down over the next decade. Let’s face it, with our current economy and deficit, the money has to come from somewhere. I think most of us agree that one source will likely be higher taxes. As that continues to happen, how important do you think tax-deferral becomes?
We face challenging times ahead in our country and our profession. Don’t lose sight of all the benefits that make an annuity sizzle! Those benefits just may be the opportunity that comes out of some of our challenges!
Author’s Bio Laura Hahn is managing director-annuity center for The Marketing Alliance (TMA),