Potential annuity holders are misled by incomplete or mistaken information about a growing and popular retirement investment.
Record 2014 annuity sales exceeding $235 billion aren’t enough to sway some investors. Overcoming common misconceptions about annuities’ validity, suitability and associated costs could unlock further growth.
Although annuities are surging in popularity across the United States investment landscape – up 3% in 2014 at nearly $236 billion, and up nearly 10% from 2011 – the product can be a lightning rod for criticism. Speculation can be traced in part to a lack of understanding, misinformation and harsh messaging by opponents and highly-visible financial industry media personalities.
Any discussion intended to level-set the annuity misconception topic begins with a brief review of annuities’ origins, purpose and definition.
Annuities are generally sold by insurance companies for retirement planning, and are defined, according to Investopedia.com as, “the promise by one party to make a series of payments of a specific value to another for a given period of time, or until a certain event occurs (such as the death of the person receiving the payments).” Many consumers today don’t realize that annuities date back to the Roman Empire. They were provided as compensation to the families or beneficiaries of a soldier killed in battle.
Annuities have evolved over time, and have become more complex as different types have come to market. Some of the more common annuity misconception include:
1. Annuities are new and untested. Not only did annuities originate in the Roman Empire, they were first offered in America in 1759 when church leaders and congregants were in search of a method to support their pastors. Today’s variable annuities originated in 1952, and were soon supplemented by payment features, riders and benefits. Index-based annuities, so popular now that more than 70% are tied to the widely recognized S&P 500, date to the late 1980s and early 1990s. So, annuities are not new. Perhaps newly popular, but not new.
2. Annuities are one-size-fits-all and loaded with fees. Annuities actually come in many styles for many purposes, with multiple options for premium payments and distributions. There’s an annuity type to suit nearly any need, including income, lifetime distributions and tax deferral. While some variable annuities have no or low fees, many annuities have no fees at all, such as fixed, single-premium and pension conversion annuities.
3. Consumers pay a hefty price when an annuity is terminated. In fact, surrender charges are commensurate with the risks and benefits taken on by the issuer and investor, and are known in advance. The 10% penalty incurred for withdrawal before age 59 ½ is consistent with other retirement vehicles, like an IRA.
4. Annuities are out of step with traditional stock and bond retirement portfolios. Actually, annuities are consistent with traditional pensions and Social Security – an investment made in advance to be paid as a series of installments later. In fact, the federal government expanded the annuity concept in 2014 by introducing the Qualified Longevity Annuity Contract as a method to convert required minimum retirement distributions at age 70 ½ into future distributions to be received as late as age 85.
With these common misconceptions addressed, it bears repeating that annuities can be an excellent retirement plan option, and annual sales exceeding $200 billion is proof. Investors are cautioned to seek counsel from advisers who can separate myth from fact, and who provide objectivity based on math and science – not emotion – when designing client-centric retirement solutions.
Syndicated financial columnist Steve Savant interviews retirement income certified professional and investment adviser representative Tripp LeFevre on Who’s Telling the Truth About Annuities. Right on the Money is a weekly financial talk show for consumers, distributed as video press releases to 280 media outlets and social media networks nationwide.