Dylan Tyson, president of retirement strategies at Prudential Financial in Newark N.J., added, “Not having reliable longevity protection can be a ticking time bomb in an otherwise well-formed financial plan.”
Annuities, he said, can provide “more predictable, inflation-adjusted spending power throughout retirement … in ways that traditional, supposedly ‘safe’ withdrawal rates simply cannot.”
But even supporters say it’s important to distinguish between different types of annuities.
“Immediate annuities may play a role in providing a guaranteed income in exchange for a lump sum,” noted Steven Podnos, a medical doctor and certified financial planner at Wealth Care in Cocoa Beach, Fla. Deferred annuities, however, which pay out either a fixed or variable amount at a later date, are another matter. “Almost all deferred annuities that are sold are indeed misrepresented and oversold,” he argued. “The commissions are high and the returns are very misleading.”
Upside Potential, Downside Protection
One of the most popular types of annuity in recent years is the registered index-linked annuity, also known as a RILA. It’s a type of variable annuity—meaning it invests in mutual-fund-like subaccounts—and it’s structured to give annuitants a percentage of the underlying investment’s gains and a degree of downside protection if the investment loses value.
“RILAs allow advisors to capture market upside [for clients] while shielding their investment from market downsides,” said Tim Munsie, head of RIA, platform distribution and planning at Jackson National Life Distributors in Nashville, Tenn. “Increased interest rates combined with higher volatility have resulted in a very attractive environment for RILA cap rates.” (“Cap rates” refers to the maximum upside potential.)
Besides their ability to generate retirement income, annuities are also championed by some for their use as wealth-transfer vehicles.
They “help keep funds out of probate, which can be important depending on the size of your estate or estate planning goals,” said Doug “Buddy” Amis, an advisor at Cardinal Retirement Planning in Durham and Chapel Hill, N.C. “But annuities are not as efficient as life insurance when it comes to taxes.”
Annuity distributions are taxed as regular income; that goes for inherited annuities, too. “Heirs typically can choose between having it taxed all in one year—lump sum—or over multiple years,” said Amis. (Nonspouse beneficiaries generally have up to 10 years to withdraw all the money.)
Better Education
Whatever the pros and cons of different annuities, their complexity causes some consternation.
“Due to there being many types of annuities, each insurance carrier offering different annuity benefits for each type of annuity, and the complexity of their benefits, costs, etc., the consumer and advisor [often don’t] fully understand them,” said Brett Bernstein, CEO and co-founder of XML Financial Group in Rockville, Md.
Ari Fischman of Telemus Capital in Southfield, Mich., might agree. Misrepresentations of annuities, he said, are “mostly limited to the advisors who are not fully versed in the overall investment marketplace.”
As the variety of annuity products has grown, though, so have industry efforts to keep advisors up to speed. “Education around annuities has improved over the last several years,” said Bryan Pinsky, president of individual retirement at Corebridge Financial, formerly AIG Life & Retirement, in Woodland Hills, Calif.
To be sure, some insurance sales reps will sell annuities purely to earn a commission, whether or not they are appropriate for a particular client. “Like any financial product, they can be misrepresented or incorrectly applied,” said Frank O’Connor, vice president of research at the Insured Retirement Institute in Washington, D.C. “But annuities help address a serious problem for workers, especially most private sector workers who lack pensions—having enough secure income to last throughout retirement.”