For a client that needs income soon (within 2-10 years), a fee-based VA with a lifetime income rider can offer tax-deferred accumulation, with upside potential and downside protection, and the option to turn on a stream of income for life that they can’t outlive. For a client that needs income later (10+ years away from retirement), they can access more tax-deferral with a simple fee-based investment-only variable annuity (IOVA), or you might consider a VA with a living benefit that allows for greater equity exposure and more investment flexibility, to maximize accumulation while also providing a floor for downside protection.
Adding guaranteed income to a portfolio can improve client outcomes. To enhance Nationwide Advisory Retirement Income Annuity (NARIA), our simple, transparent VA with “advisory friendly” fee-management capabilities, we recently announced the launch of Nationwide L.inc Advisory, a new optional living benefit. L.inc Advisory offers a 7% interest roll-up—one of the highest in the industry—and one of the industry’s highest payout rates. (As of 8/1/19. Statistics reported by VARDS on vards.com. This considers guaranteed income for life and excludes competitors that decrease income when the contract value reaches zero.) It gives RIAs and fee-based advisors a new solution for guaranteed lifetime income, that will never decrease and that clients can never outlive, even if their contract value falls to zero.
New Ruling Simplifies Fee-Based Insurance For RIAs
The right retirement income plan can help your clients save more for retirement, generate more income and mitigate longevity risk. According to Advisor Authority, more than half of RIAs and fee-based advisors (53%) protect their clients against outliving savings using a VA with living benefit riders, such as a guaranteed minimum income benefit or guaranteed lifetime withdrawal benefit. Notably, more than one-fourth of RIAs and fee-based advisors (27%) say that market volatility would make them even more likely to use variable annuities with living benefit riders to generate retirement income.
Now, a favorable private letter ruling (PLR) from the IRS recently received by Nationwide makes it easier for you to adopt fee-based insurance and annuities into your practice. The ruling concludes that the payment of an advisory fee from certain non-qualified annuities—including variable, fixed indexed, or hybrid products—can be structured to not give rise to a taxable distribution.
As a result of this PLR, the tax treatment of properly structured advisory fees from Nationwide’s non-qualified annuities will now effectively conform with those from qualified accounts such as 401(k)s, 403(b)s and IRAs. This new PLR removes a key friction point, eliminating the added cost, complexity and frustration of fee management, to benefit your clients—and your practice.
Among important guidelines cited in the ruling, the advisory fees you receive for the non-qualified annuity cannot exceed 1.5% annually of its cash value. (It is unclear whether an advisory fee in excess of the 1.5% limit would be entirely subject to the general rule concerning the taxability of withdrawals from an annuity contract or whether only the amount in excess of the 1.5% amount would be subject to the general rule.) The ruling applies only to fee-based non-qualified annuities, where you do not receive a commission related to the sale. The fee is paid with respect to the investment advice you provide specifically related to the non-qualified annuity.
As the retirement income challenge becomes one of the biggest financial planning challenges facing our country today—and as more clients turn to you to help them confront this top concern—take the time this World Financial Planning Day to help them develop a formal retirement income plan. And as new products and new rulings are making fee-based insurance and annuities easier for RIAs and fee-based advisors to adopt into their practice, evaluate where it makes sense to incorporate these new solutions into your clients’ holistic financial plans.
Craig Hawley is head of Nationwide Advisory Solutions.