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 The three-course prix fixe menu has been replaced by a more expensive à la carte.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.
• Fee structure: A major objection is multiple layers of fees. The insurance product structure itself has fees. The guaranteed return of principal upon death means the product itself is insured. The underlying funds offered by sub-account managers have management and administrative fees. These add up. In difficult market years, modest appreciation can be negated by fees. In bad years, a principal decline can worsen because of fees. Fees must be considered in the context of other charges the client is paying to the adviser to manage their money.
• High sales charges: A cause for concern for many investors and commentators. Why should you pay all that money up front? The phrase “Pay me now or pay me later” – coined by FRAM, a US manufacturer of automotive oil filters, when promoting ongoing maintenance –comes to mind. If an investor has an ongoing relationship with an adviser, it is likely they will pay for advice as an annual percentage charge on assets, or by the purchase of products with upfront sales charges with the expectation they will receive service afterwards. Commission-free annuities exist in the US, but the investor needs to find them and conduct due dilligence.