Financial Buzz from Geier Financial Group

Posted on Wednesday, November 24th, 2010 at 1:51 pm

There are two sides to every Annuity

Someone recently shared with me that they were being courted by a banker trying to sell them an annuity. They of course were told all of the advantages an annuity has to offer. However, I was surprised to hear that they had not been advised of some of the disadvantages.

First let’s do the annuity justice by recounting the warm and sunny side of things.

• There is no annual contribution limit so you are able to put away more money for retirement.
• Money that you invest in an annuity grows tax-deferred. Taxes do come into play though. The earnings are taxed at your regular income tax rate, but the amount you contributed to the annuity is not taxed.
• When you decide to withdraw the cash, you have the option of taking a lump sum payment or you can set it up so you receive a steady income stream via monthly payments.

Now we need to shed light on the darker side of the annuity.

• Variable annuities have high annual expenses comprised of insurance charges, investment management fees, and fees associated with insurance riders, etc… All of these fees added together can amount to 3% or more.
• Because most annuities are actively being sold by financial professionals receiving commissions, those commissions can be anywhere from 3 – 10%.
• Annuities have charges referred to as “surrender charges.” This is basically a fee to take the money out before a specified time (usually the first several years after purchasing one). The average is about 7% of the account value after year one and then it decreases by 1% each subsequent year until it hits zero.

There are of course other factors and details surrounding annuities. We’ve managed to capture only a handful of their traits. The important thing to remember is one should do their homework before jumping into an annuity or any investment vehicle for that matter. What may be a good investment for one person may not be a good investment for another.

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Tags: annuity, Geier, taxes