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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