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Much discussion over recent years has centered on the retirement insurance investment called annuities. One type of annuity, the variable annuity, offers investors a chance to dabble in the stock and mutual fund market at a lower risk. Discover the strengths and weaknesses of variable annuities so you can determine if this retirement investment is right for you.
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Variable Annuity Strengths
Variable annuities have three main strengths attached to them that may make them attractive to certain investors.
- Investment security:
- Principal investment is guaranteed even if the stocks, mutual funds or bonds the annuity invests in perform poorly. In addition, this amount is guaranteed should you choose to surrender or get out of the contract.
- Your beneficiaries inherit the full principal balance of the annuity at the time of your death.
- According to Annuity Straight Talk, the contract owner can lock in a predetermined future income even if the annuity’s investments perform poorly.
- Contributions: Annuities have no contribution limits as opposed to other retirement plans such as IRAs and 401Ks. If you have reached your maximum contribution limit on your other retirement plans, you can invest any extra funds into a variable annuity.
- Tax Deferment: There is no tax consequence associated with variable annuities during the length of the term. Taxes are deferred until payout time.
- Investment security:
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Weaknesses of Variable Annuities
Most of the weaknesses of variable annuities lie within the fees and charges associated with them; however, a couple of other weaknesses play important roles as well.
- Your money is tied up for the length of the contract term, which averages between seven to 20 years.
- You also do not have many investment choices. There are thousands of mutual funds on the market; however, your variable annuity may only offer as many as 50 mutual funds to choose from. With such a limited choice, you could be missing out on better performing mutual fund investment opportunities.
- Variable annuities come with high fees that fall between two and three percent annually, which can significantly cut into your money in the long term.
- If you decide to get out of your annuity before term, you have to pay a surrender charge, a tax penalty of 10 percent if you are under 59 1/2, and your annuity will not be taxed as capital gains but as income, which is a higher rate.
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After reviewing the strengths and weaknesses of variable annuities, it is time for you to make a decision. If the strengths outweigh the weaknesses then you may want to consider investing in a variable annuity. However, if the weaknesses are too significant for you to take the risk, then a variable annuity may not be right for you. As always, discuss your options with a finance professional who is going to give you a fair and balanced review of variable annuities.
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Annuity Straight Talk. (n.d.). Pros and Cons of Variable Annuities. Retrieved May 18, 2010, from Annuity Straight Talk: http://www.annuitystraighttalk.com/pros-and-cons-of-annuities/pros-and-cons-of-variable-annuities/
McQuarrie, E. F. (n.d.). Beware the Siren Song of Variable Annuities:. Retrieved May 20, 2010, from Santa Clara University: http://lsb.scu.edu/~emcquarrie/annuity.htm
Paoloni, D. (2005). Annuities: The Good, The Bad, and the Ugly. Retrieved May 19, 2010, from Investment Protection Service: http://www.investps.com/client_resources/articles/Annuities_Good_Bad_Ugly.asp