The battered annuity industry seemed to have found a powerful ally in President Obama’s administration, when the Middle Class Task Force issued a report in January saying the executive branch would work to promote the availability of annuities and other forms of guaranteed income.
Part of that promise was fulfilled Monday, after President Obama signed the Small Business Jobs Act into law. The legislation includes a provision that allows holders of non-qualified annuities to carve out some of the funds from a deferred annuity and buy an immediate annuity contract with those proceeds. The original deferred annuity will continue to grow and accumulate tax-deferred income. Designated as an offset, it is designed to promote retirement preparedness.
The Small Business Jobs Act might open more doors for the annuity industry, specifically making independent advisors and their clients more comfortable with variable annuities, which are rebounding off of a period of unpopularity. Overall, annuity sales have been up and down recently. In its second-quarter roundup of annuity sales, LIMRA estimated that annuity sales overall were down 16% year over year. Of that number, however, variable annuity sales were up 8%, underscoring the fact that more independent financial advisors are becoming comfortable with the products.
More to the point, annuities are claiming a bigger slice of overall revenues at independent broker-dealers. Annuities accounted for $3.7 billion, or 26.2%, of total revenues for 2009. Variable annuities were responsible for $3.1 billion, or 85%, of that total, and variable annuities accounted for 22.3% of overall product revenues. For their part, fixed annuities accounted for $495.3 million, or 13.5%, of total annuity revenues.
Because of their size, some small business owners are not able to directly offer qualified retirement savings plans. For employees of these companies who happen to own a deferred annuity contract, the new law gives them greater flexibility to save outside of the workplace toward a secure retirement, according to Cathy Weatherford, president and chief executive officer of the Insured Retirement Institute, based in Washington, D.C.
Currently, if an individual wants to pull a portion of money out of his or her single guaranteed annuity and buy a separate contract, that investor would have to cancel the original contract and buy two separate annuities. They would incur a surrender charge beginning at 5% of the invested amount, at least, and ranging to 7% and up, Weatherford said.
“This is a giant step forward that will allow Americans to have annuities … as they build out their retirement savings strategies going forward,” Weatherford said. “It will save money on fees for exchanges or those types of things. It is a way for people to get one more option to continue to grow next egg at time when might need guaranteed lifetime income.”
There could be more to come from the current administration, in terms of supporting the annuity industry. In February, the Department of Labor and the Treasury Department requested information for how to encourage 401(k) plans to offer annuities to their participants, which has gotten many responses from insurance companies and trade groups.
This story has been reprinted with permission from Financial Planning.
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