Variable annuities

Many people work hard for years to save enough money in a pension fund to ensure they are as comfortable as possible when it comes to the time for retirement. When that time comes, however, it’s not simply a case of taking out the money that has been built up. In order to have a guaranteed, regular income, the usual process is to buy an annuity.

A recent article has taken a close look at a certain type of annuity, known as a variable annuity, in terms of how some insurance providers are trying to persuade customers to surrender them and invest in another product. Before looking at this in more detail, it would be appropriate to explain more about annuities in general.

What is an annuity?

Annuities are financial products that allow pension savings to be converted into that regular income for the rest of the retiree’s life. There is a range of different types of annuity, but the basis of them is that the saver is offered an income rate as a percentage, and the annual income will be based on the amount of savings held. For example, if there are savings of $100,000 and the annuity rate offered is 5% that would equate to $6,000 a year as income.

Annuity types

It is up to the investor to decide what type of annuity will provide the best for retirement, and for every person there may be different or relevant circumstances that apply. This is particularly the case if a partner is involved. It’s important to find out what level of fees are being charged by the annuity provider and to shop around to find the best deal. Here are some examples of annuity types.

• Single life annuity: the individual saver is paid all of the income
• Joint life annuity: following the death of the saver, some or all of the income is paid to the partner
• Enhanced annuity: more income is paid if the saver has a medical condition
• Escalating annuity: the income goes up every year at an agreed rate that may often be the rate of inflation
• Fixed-term annuity: this type pays out for a given period and then a lump sum is paid
• Variable annuity: money paid in is put in to a range of investments that the saver can choose, and the return is determined by how those investments perform over a period of time 

Annuity benefits

For the majority of annuities the main benefit is that there is a guaranteed annual income until death. That income, depending on exactly what type of annuity is purchased, will remain the same, though for investment-based products income rates may vary and an escalating annuity will keep up with annual inflation. Some annuities will also pay more income if the saver is in poor health.

Surrendering annuities

There are circumstances when investors decide that they want to surrender their annuity. It may be that they need a lump sum for a specific reason, or they are not convinced that what they are buying is the best vehicle for their needs in the future. This is where the importance of the surrender period kicks in.

The surrender period is the length of time a saver has to wait before money can be withdrawn from an annuity without incurring a penalty. Surrender periods vary and penalties can be high, so savers should research carefully before taking out an annuity in the first place and be certain about the rules and regulations that apply.

The case of variable annuities referred to above provides a useful illustration about surrendering such products. Some insurers have been trying to persuade customers to sell back these annuities, especially those that have rich income guarantees. They also appear to be raising fees and limiting investment choice as well as blocking additional contributions to accounts. Low interest rates and a jittery stock market means that the guaranteed income payouts are hitting the insurers’ own margins, hence the desire to encourage investors to surrender them.

As stated earlier, there may be genuine reasons for an investor to want to surrender their annuity, but if the insurer does not want to buy it back there may be heavy charges to pay. One way around this is through the advisory firm Fisher Investments, which offers to cover most or all of the charges in lieu of an annual fee for new clients who decide to invest with the firm. It’s a novel and attractive way to generate new business and can save investors considerable sums of money.