Annuity sales hit record levels as boomers look for safety and lifetime income

(post-gazette) -- Baby boomers craving financial certainty and shunning stock market risk were practically standing in line to buy annuities early this year, according to an insurance research organization which reported sales reached the highest level in a decade.

“Annuity sales in the first quarter are definitely a reflection of a flight to safety,” said Teodor Panaitisor, a research analyst at Windsor, Conn.-based Limra Secure Retirement Institute. 

“Looking at the numbers, we can assume that individuals are looking for protection during periods of volatile markets.” 

Fixed annuity sales hit $38 billion, an almost 40 percent increase from the same period a year earlier, according to Limra.

Overall U.S. annuity sales rose 17 percent to $60.8 billion. It is the highest first quarter for total annuity sales in a decade and the strongest start for fixed annuities ever.

Ashby Daniels, a financial adviser at Shorebridge Wealth Management on Washington’s Landing, said the strong growth is driven partly by fear of an unpredictable stock market as well as the common concern that retirees have of running out of money.

“If you are looking for ways to not outlive your income, an annuity can be a great idea,” Mr. Daniels said.

Annuities are contracts between consumers and insurance companies, which guarantee a specific amount of monthly income for a specified time frame.  

The two main types include fixed annuities, which pay a set monthly payment in exchange for a set investment amount, and variable annuities, which provide irregular payments based on the performance of investment funds managed by the insurance company.

There also are two different payout options — immediate annuities and deferred payment annuities. With an immediate annuity, the consumer begins receiving income immediately after making a lump sum investment. Deferred payout annuities do not pay until a set future date, usually at retirement.

Annuities are gaining popularity with people either retired or nearing retirement because they offer a guaranteed lifetime source of income that can supplement Social Security or pension.

Annuities are an asset that is non-correlated with the stock market, which allows them to reduce the risk of losing significant chunks of their nest egg during a market downturn.

While there is no tax deduction on money put into an annuity, investment gains are tax-deferred until they are withdrawn. All payouts are taxed as income as with an IRA or a 401k.

But this type of investment also comes with some notable disadvantages.

Annuity payments are taxed as ordinary income, not long-term capital gains. This would have the greatest impact on wealthy people in the top income bracket, which is 37 percent.

By contrast, capital gains taxes range from 15 percent to 20 percent. Annuities also carry a hefty penalty of 10 percent or more for people who withdraw from them before reaching 59.5 years of age.

Annuities have a reputation for charging consumers some of the highest sales commissions in the financial services industry.

Still, interest from investors continues to be strong.

J. Victor Conrad, owner of Pinnacle Financial Strategies in Pine Township, said with the Fed raising rates last year, rates on annuity products also have gone up — making them more attractive alternatives to other fixed rate investments like bank certificate of deposits and bonds.

“Fixed annuities are simply another tool that could be used in implementing a client’s overall investment strategy,” he said, adding that consumers should make sure the annuity they choose is the right fit. “They are far from one-size-fits-all.”


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