Typically, clients already have a substantial pot of tax-deferred money through their IRAs and workplace retirement plans. For the most part this is a good thing because the client received a tax deduction for their contributions. Yet-to-be-taxed employer contributions and matches are great bonuses too.
For non-qualified accounts, plunking money in an annuity just creates another deferred tax bill for clients or their heirs through Income in Respect of a Decedent (IRD). They get no benefit up front.
When annuities are used in IRAs or other retirement accounts, the deferred taxes are the same as if they used other investments, but the client gets a layer of complexity and costs that to me are simply unnecessary. The guarantees that can be had in the annuity contracts are usually overpriced, sometimes abhorrently so.
Even lower cost annuities that have no surrender fees present additional hoops to jump through to place trades, move money into the contract, take money out of the contract to invest in things not available in the contract, or simply get funds to spend.
When EIAs first came out, the pitch was equity returns without downside risk. That was bunk. EIAs are not considered an investment in the securities markets and are regulated as a fixed product. These days fewer EIAs are aggressively touted as an equity substitute, though that pitch is still common.
Now, the pitch we see more often is that an EIA can be a great enhancement to the fixed income portion of a portfolio. I find the strategy underwhelming.
As a fixed product, by law, the insurer must be conservative with the funds. They basically buy bonds to meet the guaranteed rates and use the remainder, after accounting for the insurer’s costs and profit, to take positions in various derivatives tied to certain stock market indexes. The guaranteed interest payable, should the equity markets perform poorly, will be lower than what can be earned from conventional bond holdings. Further, to get above bond market returns, the equity markets need to rise.
Keep in mind too that common EIA structures apply credits to a value that the owner can’t actually get their hands on and is used to determine an annuitization payment. This value is higher than the amount they could walk away with. If annuitization is not in the cards, that untouchable number is irrelevant and the actual accessible cash value is what is important.
EIAs are tough to model because the insurer will change various factors like participation and cap rates as stock and bond markets conditions change. Fortunately, you don’t need a model to see flaws in the “EIA as bond substitute/enhancer” strategy.