As an RIA, you are always looking for ways to diversify and help produce more income for your clients’ portfolios. In some cases, the answer lies in adding variable annuities. This type of investment is complex and not without risk, but it does carry several advantages, including tax-deferral status and the assurance of lifetime income. Let’s look at the benefits of adding variable annuities to your clients’ retirement investment plan.
Defining Variable Annuities
Annuities represent a way for investors to increase savings, protect what they have already saved, and gain a regular income stream in retirement. There are two categories of annuities: tax-deferred annuities and income annuities. Variable annuities fall under the tax-deferred category. A variable annuity is contracted with an insurance company. It offers more freedom to choose where and how much money to invest. (As opposed to a “fixed annuity” in which the insurance company decides how the funds will be invested in exchange for a specific amount of return.) The funds might be invested in stocks, mutual funds or bonds, or a mix of all three. The funds are subject to the same fluctuations in the market that affect all investors so they do not offer a specific amount of return.
7 Benefits of Variable Annuities
- Potential for greater returns – The main benefit is that variable annuities offer a chance for a higher return than other types of investments. The longer the investment remains in the annuity, the greater the chance of substantial growth. An investment of 20 years or more can see a higher return than any other type of annuity.
- Guaranteed income in retirement – Variable annuities mean your clients can enjoy peace of mind knowing that they will have an extra revenue stream. There are two ways for the income to be distributed.
- Annuitization: Control of the investment is turned over to the insurance company, which will guarantee a fixed amount of regular income. Your clients will know exactly how much they will have to live on each month. The payments can be made for life or over a specific time period, 10, 20 or 30 years. Any funds that are remaining upon death of the annuity owner will go to his or her beneficiaries.
- Optional lifetime income guarantee: This option works as a living benefit and is similar to annuitization, but it offers more flexibility. Annuity owners will still have guaranteed income, even if the market fluctuates. Some living benefits offer guaranteed income growth and opportunities to make changes in order to take advantage of future gains. Depending on the type of variable annuity, your clients may choose to start receiving payments as soon as they purchase it.
- Tax benefits – Like an IRA or 401(k), income earned through a variable annuity is tax deferred until the funds are withdrawn. The money can also be re-balanced and moved around within the fund without having to pay taxes. However, the initial investment must come from a source other than a tax-deferred retirement account like an IRA.
- More flexibility – Diversification is essential to any portfolio. Variable annuities offer a wider range of investments so you can choose the ones that are best suited for your clients’ needs. You can also spread investments around to minimize risks if the market does suffer a downturn.
- Unlimited contributions – Unlike some investment funds, there is no limit to the amount that can be put into a variable annuity. This can make them a wise option for clients who are looking to shelter more of their taxable income.
- Legacy protection – Most annuities also include a death benefit. Upon the death of the fund owner, the beneficiaries have a choice about how to receive funds. They may receive at least the amount that has already been paid into the annuity or the current value of the annuity.
- Funds are not subject to probate – Variable annuities are exempt from probate, which means beneficiaries can receive the funds right away rather than wait for a lengthy legal proceedings.
Cautions Regarding Variable Annuities
Although variable annuities offer a guaranteed income and a greater return on investment, there are some limitations.
Early withdrawal penalty – Similar to tax-deferred plans like an IRA or 401(k), there is a fee of up to 10% if the funds are withdrawn early. In addition, the withdrawn funds will also be taxed as any other income.
Higher fees – Variable annuities can have a number of substantial fees and charges attached to them. The fees run between 2% to 2.5%, although some annuities can be as much as 4%. By comparison, broad market exchange-traded funds, mutual funds, large-cap stocks and small cap stock funds are much lower.
Variable annuities represent another option for RIAs to expand and diversify client portfolios. There are several advantages, including a guaranteed income during retirement, greater control over how the funds are invested, the potential for a higher return on investment compared to other types of annuities and mutual funds, and tax-deferred income.
PKS Investments is a full-service broker/dealer and financial services firm. We have over 500 locations and 1200 Registered Representatives, offering state-of-the-art products and technology. Our Registered Investment Advisors (RIA) have the freedom to offer a full spectrum of investment choices, including insurance policies as part of a long-term financial strategy. If you are an RIA, contact us today to discuss your future.