Variable annuities also offered a minimum internal rate of return on your income benefit. If the stockmarket was flat, your income or withdrawal benefit base would still be marked up by, say, 5 per cent on your anniversary date. It was a good deal: if the market did well, you captured the upside; if it did not, you received a 5 per cent increase in income or withdrawal value. The new valuation floor for the contract holder was set on your account anniversary or sometimes even more frequently.
The difficult stockmarket in 2008 and 2009 changed the landscape. Many of these benefits are still available, but on an item-by-item basis. The three-course prix fixe menu has been replaced by a more expensive à la carte. The investor has the choice of which benefits they are prepared to pay to receive. For example, a stockmarket investor with a long-term horizon might not want to pay extra to have the original lump sum guaranteed as a death benefit for their heirs.
Some investors want lots of investment choices. Many variable annuities offer 90-plus funds or investments offered by sub-account managers with household-name recognition. This can include investments where liquidity has been a concern, such as hedge funds. Considering annuities in the accumulation phase as a long-term investment, offering some investment choices with a long-term horizon makes sense.
Other investors want decisions made on their behalf. These clients can choose asset allocation models or professional money management.
When the contract owner wants to start collecting income for their lifetime, the contract switches to the distribution phase. Fixed annuities pay a set level of income for their lifetime. Often they involve protection in the case of the contract owner’s early death by continuing the income to a named beneficiary for a specified period. A contract might stipulate income for “life, 10 years certain.” Fixed annuities do not protect against inflation. Some companies offer fixed index annuities, tying the income level to a key interest rate. This provides some buying power protection.
The pros and cons
• Ownership of the money: During the accumulation phase when your money is growing, you own the money, although moving everything out will likely involve a substantial surrender charge for a contract sold with a commission, declining typically over a five- to seven-year period. Once you enter the distribution phase after annuitisation, the insurance company owns the money and you receive the income stream for your lifetime. This is good if income is paramount, but negative if you want ownership or want to pass the remaining funds to your heirs.
