Variable Annuities

According to the Securities and Exchange Commission, variable annuities come with two phases. There’s the accumulation phase, in which investor contributions—known as premiums—are allocated among portfolios—known as subaccounts—and the annuity’s earnings grow. The second phase is distribution, in which the investor withdraws money either as a lump sum or though other payment options. The term deferred annuity refers to an annuity in which payments are deferred to the future; an immediate annuity is a product that starts payments immediately.

The rate of return associated with a variable annuity is not stable, but varies according to the stock, bond, and/or money market subaccounts that make up the underlying investment options. What this means is no variable annuity guarantees a return on the investment. In fact, there is always the risk that investors might lose money from the investment. This is why variable annuity products are registered with the SEC and regulated by the SEC and FINRA.

The PROs

Periodic payments: Variable annuities allow you to receive periodic payments for the rest of your life (or the life of your spouse or any beneficiary). This prevents one from outliving their assets since the annuities will not terminate until death.

Death benefit: Variable annuities provide that, if you die before you have started receiving payments from the insurance provider, your beneficiary is guaranteed to receive a specified amount. This amount is usually at least the amount of your purchase payments.

Tax deference: Variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. For many this is both a benefit and a detriment since the lump sum you withdraw will generally receive higher tax treatment than the smaller sum you put into the account.

The CONs

Unfortunately, for every pro there is an equal and at time more prominent con to variable annuities. The problem is, these are rarely discussed with clients by brokers who are eager to earn commissions from these investments.

Risk: A variable annuity is inherently more risky than a fixed annuity because the payments you receive from the insurance company is determined by the performance of the investments you choose. As a result, it is essential that your broker know your risk tolerance in order to make suitable investments for you.

Penalties for early withdrawal: Additionally, while variable annuities are tax-deferred, you will receive a penalty for early withdrawal. While you pay no taxes on income and investment gains you hold before you withdraw your money, when you do withdraw funds, you will be taxed based on ordinary income tax rates rather than the lower capital gains taxes associated with other investments. Also, in many cases you may receive a 10% federal income tax penalty if you withdraw funds before you are 59 1/2.

Broker commissions: What most investors fail to realize is that brokers receive a commission for every time they sell an annuity. In fact, in most cases the broker receives as high as 7-10%. In addition to these commission, brokers receive a trailer fee over time for simply “managing” your account. A brokers’ self-motivation cannot be ignored when it comes to investments, especially with something as precious as your retirement fund.

Inflation: Finally, given the current state of our economy, prevailing interest rates are so low that committing funds could expose you to a meaningful amount of inflation risk.

If you or someone you know has lost money in a variable annuity and you feel that it is as a result of wrongdoing on the part of a broker or member firm, do not wait. Contact the experienced and dedicated securities attorneys at Fitapelli Kurta today. We specialize in investment and security fraud and prosecute cases nationwide on a contingency fee basis. The law offers you a limited window of opportunity for recover in these cases, so do not wait. Call us now for your free consultation.