In the recent past, annuity investments were generally frowned upon by advisors, due largely to their inflexibility, fees and the use of them inside retirement programs that were already tax sheltered programs. Limitations with regard to survivorship options, investment choices, presented a formidable detraction from the benefit of the guaranteed income these products offer.  Furthermore, the cost to purchase the guaranteed income stream was to give up your principal investment. In summary, the terms of the annuities offered just decades ago were designed to generate large profits for the providers without regard for the diverse needs of the individual investor.

Recent changes to the terms of annuity products, made by the insurance companies that offer them, have resulted in the reemergence of annuities as a viable option for many investors. Specifically, today’s annuity products offer more flexible, “living” benefits, which provide the guarantee of income as well as the possibility of growth. Gone are the days of menial guaranteed returns – annuities now offer a range of investment objectives that keep pace with inflation and can take advantage of market returns.  Most importantly is the ability to obtain guaranteed income without giving up access to your principle!

One common theme of these modern, diverse annuity products is the concept of a “protected value”. This feature locks in the higher of a selected investment strategy annual return or the minimum guaranteed interest rate. Two specific examples are depicted below:

Example 1: $350,000 Income Base, 5% Minimum Guaranteed Interest Rate, Fluctuating Market

Example 2: $350,000 Income Base, 5% Minimum Guaranteed Return, Bear Market

One advantage to using annuity products is the tax benefit. Capital gains taxes have increased in 2013 for high income earners in the top two tax brackets and an additional 3.8% tax has been levied as a part of the new health care legislation. Tax-deferred annuities with a protected value may, therefore, provide a significant premium for certain individuals, especially when compared to non-retirement (taxable) accounts. Mutual fund holdings, particularly, in a taxable account are subject to taxes resulting from portfolio turnover executed by the fund manager, dividend distributions, and the sale of the mutual fund shares. In a tax-deferred annuity, no taxes are levied on distributions or income that is reinvested.

I feel this is a great asset protection program that gives you the opportunity to maintain control over your accumulations, grow your assets on a tax-free basis, and create a guaranteed lifetime income stream for you and your beneficiaries that is not subject to market volatility along with a guarantee death benefit. Tax-deferred annuities have been a strategic piece of my clients’ retirement income planning used as a compliment to other retirement assets. With the growth we have experienced in the market and the ability to lock in your gains for future income, it is an ideal time to learn more about tax-deferred annuities and their living benefit guarantees.

Judy L. Esau, ChFC, AAMS

Annuities are typically designed for retirement income and may have penalties applied if you take funds before age 59 ½.  There are fees charged for their guarantees and you should make sure you understand all fees and restrictions that may be associated with the particular program that you are reviewing.