Financial professionals who help clients transition into their retirement years are well aware of the current intense focus on predictable income. For many, the challenge is finding a product solution that appeals to the client’s desire for income security and growth potential while also providing some measure of flexibility so that the client need not lock money away completely to achieve the desired benefits.
Annuities, in one form or another, are proving useful to help clients with their retirement income needs. In a survey released in September of 2012 by the Insured Retirement Institute (IRI) and Cogent Research, roughly 84 percent of financial professionals reported that they are having more conversations about retirement income than they were five years ago. Additionally, this same study found that more than 70 percent of financial professionals using annuities said their clients had asked to purchase an annuity.
Trade-offs of income security
In their quest for reliable income, buyers of traditional immediate annuities have long chosen to give up some or complete access to their money as a trade-off for specific income guarantees. This has worked for individuals who are close enough to retirement to know roughly what their income needs will be and how much money other sources of income (such as Social Security and pensions) will deliver along the way.
For younger buyers, however, there is much less clarity about how reliable their non-annuity income streams will be. For these buyers, deferred income annuities have played an important role in their retirement income planning. By delaying their income start date, buyers are able to enjoy higher monthly income payments at a time when they need that income. The drawback to these annuities is that they, too, generally provide limited to no flexibility in terms of access to their principal.
Seeking a more balanced approach
For clients seeking a more balanced approach – guaranteed lifetime income with greater flexibility – there is a new product type of fixed annuity that melds the features of a deferred income annuity, traditional fixed annuity and fixed indexed annuity to provide income, access to funds and potential income base growth through index credits (see below for more details on this new product type).
The strategy behind this new product concept is to provide an incentive to keep money in the annuity for longer periods, while still providing flexibility for times when an individual needs to access their funds. The incentives can come in two forms. The first is a guaranteed “step up” in benefit value for clients who defer income payments. For example, if a client defers income payments for five years, the benefit value base might get a boost to the annuity’s premium, minus withdrawals. The longer they delay their income starting date, the greater the benefit value base.
The second incentive involves the opportunity to capture potential income growth based on changes to an index (such as the S&P 500® Index) during each contract year. This potential growth through income credits (subject to an index cap), combined with the “step up” benefit mentioned above, may give the client a higher benefit value base, which is used to determine the amount of income payments.
These new income fixed annuity products may even ease the uncertainty clients may often feel when locking into typical annuity contracts. In this case, if a client decides after 10 years that other income sources are enough to provide security, or if an inflationary period makes the annuity seem less desirable, he or she can forego taking advantage of the “step ups” and index-linked income credits and simply take out the annuity’s principal and move on. This kind of flexibility can be reassuring both at the time of sale and for the life of the contract. Surrender charges will apply if the contract is surrendered within the first nine years. Early withdrawals and other distributions of taxable amounts may be subject to ordinary income tax and if taken prior to age 59-and-a-half, an IRS 10 percent premature distribution penalty tax unless an exception applies.
Clarity and understanding
Traditionally, a major hurdle for potential annuity buyers has been a lack of understanding of annuity concepts. This issue continues to persist: according to the recent IRI/Cogent survey previously mentioned only 5 percent of non-annuity owners identified themselves as being very or extremely knowledgeable about annuity products.
This hurdle, however, also represents an opportunity for financial professionals. Annuities have the potential to address many of the top-of-mind client issues related to retirement, lifetime income, principal protection, and hedging against inflation. Their unique ability to help with these issues is opening up new markets and attracting younger investors to the product. By investigating the latest innovations in annuities, financial professionals will be better positioned to address their clients’ retirement planning needs today while solidifying relationships for the long term.
The S&P 500 Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by ING USA Annuity and Life Insurance Company (ING USA). Standard & Poor’s®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by ING USA. ING USA’s ING Lifetime Income Annuity is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.
Contract Form Series: IU-IA-3119; IU-RA-3120; IU-RA-3121; IU-RA-3122; IU-RA-3123, may vary by state and may not be available in all states.
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