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Annuity Home

History of Annuities

The Power of Tax-Deferral

A Myriad of Options

Annuity Flexibility

Choices to Consider

Designed for Retirement

Common Benefits

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Designed for Retirement

With so many options, it's easy to lose sight of why annuities were created in the first place.

Annuities are meant to be long-term savings vehicles for retirement, and the strict penalty discourages transactional investors from haphazardly moving money in and out of annuity contracts.

As a means of saving for retirement, Congress imposes important restrictions on annuities. Just like IRAs and 401(k)s, any withdrawals made before age 59 1/2 are subject to a 10% federal tax penalty.

Annuities also tend to have longer maturity periods. Unlike mutual funds, which can be liquidated easily, annuities are typically 5-10 year contracts (depending on the issuer). Should you need the annuity money in an emergency, the funds you withdraw may be subject to "surrender charges" by the insurer. Surrender charges, which can climb as high as 10%, can easily wipe out your gains.

There are other fees in annuity contracts that, while beneficial, inhibit "quick sales." For instance, variable annuities often incur a Mortality and Expense charge. Usually a percentage of your account's value, M&E charges compenstates the insurance company for risks it assumes under the annuity contract. M&E charges sometimes are used to pay for commissions to financial professionals.

In addition, the insurer may deduct administrative fees from your annuity account. Just like banks and brokerages, insurance companies will have a fixed expense for maintenance of your account. These administrative fees can be fixed (e.g. $25 or $30 per year), or they also may be a percentage of your annuity's value. Check the insurer for details.

And if you own a variable annuity, the money managers operating your variable accounts will incur fund expenses. Mutual funds typically have an annual fund expense, represented as a percentage of account value. These money managers will typically charge the same fees for their variable accounts, too. Be sure to ask your Annuity Specialist for a prospectus, which explains the fees and charges in detail.

What if you're getting slapped with these fees, but your annuity is not growing as fast as you'd like?

If you own a variable annuity, you could consider switching into other variable accounts. That way, you would not incur any surrender charges or capital gains.

Suppose you're not ready to retire, but you've discovered your existing annuity is no longer competitive. Withdrawing money prior to age 59 1/2 will incur a hefty 10% penalty on your gains. What are your options?

At any time, you can elect a so-called "1035 Exchange" to a different annuity contract. Section 1035 of the U.S. tax code allow you to exchange one annuity contract for a new one without paying tax on income and investment gains.

These tax-free exchanges can be useful if you come across another annuity with a more competitive rate, better payout options, or a wider selection of investment choices.

If you do elect to do a 1035 exchange, you may still be subject to surrender charges from your old annuity. The new annuity you are switching to may offer a "bonus" or enhanced rate, which may offset any surrender penalties from your previous annuity.

Remember that, if you do a 1035 exchange, you may be subject to a new "surrender" period in your new annuity. You could incur a new set of fees if withdrawals are made prior to maturity. In other words, always read the fine print, and don't be afraid to ask how much this exchange could cost you.

Your Annuity Specialist can clearly spell out the pros and cons of switching. Before giving the green light to make switch to a new annuity, make sure you are comfortable with the exchange, and understand what effect it will have on your annuity.

After all, this is your retirement money. You can't afford to put your life's savings at risk.




There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59-1/2 may result in a 10% penalty, in additional to any ordinary income tax. The guarantee of the annuity is backed by the financial strength of the underlying insurance company. Investment sub-account value will fluctuate with changes in market conditions.

























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