DEFERRED FIXED ANNUITIES: The “New-Reality” Savings Vehicle

According to a report by the Insured Retirement Institute released March 7th, almost 75% of boomers say tax deferral is an “important” factor in their decision to choose a retirement product; 40% say it’s “very important.”

Flexible Premium Deferred Annuities (FPDA) may become the  savings vehicle of choice in the future as interest rates start to come back from their all time lows.  Since the 10-year Treasury bond rate recently showed three solid increases – it is now 2.09% –  analysts are cautiously suggesting that the interest rate market may be beginning to show some life again.

Annuities are a unique financial instrument in that  the policy owner cannot lose principal or basis (the sum of all premiums or deposits made into the contract).  Most annuities have a guaranteed interest rate so that even in rough times, there is at least some growth in the money placed there.

Annuities are also one of the fastest-reacting savings plans to even minor movements in the interest rate market.  Many insurance companies have announced new, increased credited rates effective this month.  It will be interesting to see how much confidence the annuity carriers have in the recent turn around on the 10-year treasury bonds, and by how much (if any) additional interest may be credited going forward.  (There still seems to be a lack confidence in the current economy, so don’t expect astronomical interest rate increases.)

Tax treatment of annuities was set long ago to encourage savings by individuals.  Payouts may not be entirely income-tax free, but growth before the payout period is tax-deferred.  The original idea was that annuity savers would be in a lower tax-bracket when they started taking out money from their annuities for retirement and would therefore benefit from having saved tax-deferred.  That may not necessarily be the case in the future, depending on how tax reform and health care reform ultimately pan out, however.

Unlike life insurance, the death benefit of an annuity is the account value at the time of death and may not be fully income-tax free.  But, the point of an annuity is not to serve as a substitute for life insurance, but rather be paid out like a pension would be.  The benefit on the pay-out side of the annuity is that it produces an income that one cannot outlive. 

A lot of agents and advisers don’t “get” annuities.  When I first came into the insurance business, I didn’t understand them at all.  When I did, I couldn’t imagine why any one would buy one.  Now that I’ve been around the corner a few times, I wish I had purchased a deferred annuity and made regular payments into it as a hedge against my other retirement accounts taking a nose-dive (which they did in 2000 and 2008).  While my growth in an annuity would have plunged as well, I wouldn’t have lost principal, as did my retirement accounts.

Increasingly, deferred annuities should be considered part of everyone’s savings portfolio.  Younger savers haven’t been blind to what has happened to their boomer parents and grandparents during the Great Recession.  They’ve seen their potential inheritances shrivel and their parents having to continue to work long after the customary retirement age.  “Gen X”-ers are going to be good prospects for a discussion about regular deposits (premium payments) into a FPDA.

Learn how annuities work.  Some agents and advisers have increased their practice’s income many times over by educating and selling annuities to their customers and clients.

NOTE:  Nothing in this blog article should be taken to be tax advice, nor should any movement of retirement or investment money be made without the counsel of a qualified tax professional.