Retirees with 401(k) plans and individual retirement accounts will have more flexibility to purchase annuities that don’t start paying out until age 80 or 85, under final rules from the U.S. Treasury Department.
The rules announced today provide a new way for retirees to limit the drawdowns of their account balances that are now required starting after age 70 1/2. Instead, under the rules, they could use as much as 25 percent of their account balances up to $125,000 to purchase deferred annuities.
“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live,” Mark Iwry, deputy assistant Treasury secretary for retirement policy, said in a statement.
The Treasury Department’s final rules give the government’s blessing to the concept of longevity insurance, which hasn’t taken hold in the market, in part because of the required distribution rules and because of relatively high fees that deter potential purchasers.
About one in five 401(k) plans offers annuities as a choice, according to the Treasury Department.
Longevity annuities carry some risk, primarily that the retiree will die before receiving a payout. The final rules, first proposed in 2012, allow for return of premiums as a death benefit.
New York Life Insurance Co. was the largest seller of deferred-income annuities last year, followed by Massachusetts Mutual Life Insurance Co. and Northwestern Mutual Life Insurance Co., according to data from the Limra Secure Retirement Institute.
Those three companies account for 90 percent of the market, according to Limra.
Iwry announced the final rule at a conference of the Insured Retirement Institute, whose members include MetLife Inc. and American International Group Inc.
Treasury: Retirement Accounts Can Include Longevity Annuities To Limit Drawdowns
July 1, 2014
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Comments
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Question - If a client moves assets in an IRA to a "longevity annuity" is that asset subject to RMD?
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As great a product as the Deferred Income Annuity is, as mentioned by Mr. Schwebach below, that is not the subject of this article. The key idea behind a Longevity Annuity is that many people will die without ever collecting a dime. That enables the premiums to be very small, like homeowner's insurance which people dutifully pay and never get mad when they don't collect. Acting as true insurance, it allows a small amount of money to protect against a large catastrophe - outliving one's assets. That enables the client to a) increase the amount of consumption now, at younger ages, and/or b) pass on money to the children now, maybe through gifting, instead of an indeterminate time in the future. Truly a useful product.
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The Northwestern Mutual Deferred Income Annuity does not result in a loss of principal if the Annuitant dies prior to receiving income. Rather, the deposit is returned to the Account-holder in the way of a full death benefit. Moreover, the contract is eligible for annually declared dividends which can be applied towards purchasing incremental increases in guaranteed monthly income. Current contracts receive 5.50% dividend interest crediting rate for 2014-pretty remarkable, and from a AAA rated company too.