|Wall Street Journal Response - CORRECTION |
NAFA, the National Association for Fixed Annuities, promotes the awareness and understanding of all fixed annuity products. Your June 7th article, “Annuities: Fine Print Needs a Check”, provides valuable information to help consumers understand these important retirement planning products. We recognize that your column had to make generalizations due to space constraints and are sure you would agree that the following fine print in a fixed annuity contract deserves a follow up column and NAFA would welcome the opportunity to provide information to you.
But first, the association needs to correct the data source that told you the highest current rate for a five year annuity is 4.65%. As of 6/11/2008 it is actually 5.30%. (SOURCE: annuityratewatch.com)
Now to the other fine print. Stating that younger generations may not be suited for fix annuities ignores the vital role a fixed annuity may play for a portion of retirement funds. And what do you mean by younger. With people living well into their nineties, baby boomers are looking at potentially 30 plus years of retirement. Remember, “younger” generations have been criticized for not saving sufficiently for retirement. Those who have the foresight to set aside money for their retirement are statistically paying into qualified distribution plans - 401(k), 403(b), etc - which are not available for withdrawal without a tax penalty until age 59 ½. This is no different than the penalty for withdrawing funds from an annuity before age 59 ½.
It is true that there are products available with longer surrender charges. It is also true, and consumers need to be made aware, that there are also many products available with surrender periods of five, four, three and two years. In fact the overwhelming majority of fixed declared-rate annuities have less than 10-year surrender periods. It is reckless to categorize all fixed annuities as unwise choices for younger generations especially considering the flexibility in length of contract that are available in the marketplace today. In addition, all NAFA member companies follow the new NAIC surrender disclosure requirements and consumers must be shown the disclosures explaining the surrender period and charges before they purchase an annuity. Also, your readers should be told that when a new annuity policy is delivered to them, they may review the surrender charges again to make sure they understand and are completely satisfied. If they aren't, all annuity contracts offer a FREE LOOK PERIOD during which they may return the policy and receive a full refund of their initial payment.
These choices are important considerations when selecting a fixed annuity. Many individuals prefer the longer surrender periods when they are uncertain about when and if they will need additional income. One of the most desirable insurance features of a fixed deferred annuity is that it guarantees an income stream you cannot outlive and allows you to put off (defer) the decision until some date in the future. The flexibility of the contract also allows you to move up the date when you want to begin to receive your income payments. You do not need to know that date today and the longer deferred annuity gives you peace of mind that you may exercise your guaranteed income benefit, but you don't have to – ever. Also, in exchange for the longer surrender period you can receive even higher interest than the interest paid in shorter surrender annuities. Some come with additional interest bonuses. On the maturity date required by state law (95 or older in most states) you may choose the full value of the contract in a lump sum or over time.
If you would like to write a second column on Fixed Annuities: The Other Fine Print, please feel free to call us and we will provide you with the necessary resources and information to ensure your readers understand all the things they should consider when buying a fixed annuity. Please call us at 888-884-NAFA or email email@example.com. Also consumers are encouraged to visit www.annuiityinfo.com for more information and tips about buying fixed annuities.
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By M.P. MCQUEEN
A shaky stock market and low rates on certificates of deposit have sent investors flocking to fixed annuities with deferred payouts. But they aren't a smart choice for many savers, particularly younger ones or those who may need ready access to funds.
In this type of annuity, savers often make a one-time payment. And the issuer of the annuity, an insurer, guarantees to pay a certain interest rate for a certain period of time.
Say you stuck $100,000 in a five-year deferred annuity at a 4.2% rate. In five years, you would get back $122,839. And you wouldn't owe taxes on the $22,839 in interest until you cashed out the annuity. If you had your money in the CD, you'd pay taxes every year.
The government aims this tax break at retirees. So if you're under 59½ years old, you'll also get slapped with a 10% federal penalty on the gain when you cash out the annuity.
Sales of individual annuities of all types rose 9% in the first quarter of 2008, over the same period last year, to $63.4 billion, according to LIMRA International, an industry research group.
Agents in banks may be promoting deferred annuities because the rates look enticing compared with other investments. The average yield on a one-year CD is 3.12%, and the average five-year CD pays 3.62%, according to Bankrate.com. A five-year deferred fixed annuity paid an average yield of 4.13%, and the highest rate available was 4.65%, according to ComparativeAnnuityReports.com.
Deferred annuities can come with baggage, and you should read a contract carefully before signing one. Some have sizable surrender charges if you try to cash in the annuity before a specific period -- sometimes as far out as 10 years. That makes them unsuitable for people with limited resources, especially the elderly. Regulators in several states and FINRA, the financial-industry watchdog, have issued warnings against unsuitable sales of deferred annuities to senior citizens. CDs also have penalties for early withdrawal, but they're mostly forfeited interest and tend to be less onerous.
CDs are federally insured up to $100,000. Annuities are guaranteed mainly by the financial strength of the insurance company that issues the contract.