Protecting The Innocent

Sunday, June 29, 2014 20:04
Protecting The Innocent

Tags: annuities | client education | selling

I've written about the "evils of annuities" before. What is amazing to me is that annuity-pushers are still ripping people off and getting away with it!

Here's a case in point. A friend of mine emailed me that her parents were talked into buying an annuity. They were invited to a "free" steak dinner by a "financial planner" to listen to an "educational" presentation. (The quotation marks are intentional. The sentence should read: They were enticed into a sales pitch with a steak dinner by a shyster.) After hearing the presentation, the signed up for an annuity in the amount of $40,000.
Now, $40,000 might not seem like a lot for those of us advising clients with portfolios of several million dollars. For my friend's parents, $40,000 was a huge chunk of their savings. The scumbag who sold them this annuity made a commission many times over the cost of their dinners. And who knows how many others fell prey to this scheme?
Let's look at the problem. My friend's parents did not have much in liquid savings. Sure, they have some IRAs, but non-retirement cash was minimal. Now, the vast majority of it is tied up in an annuity.  If they want to take money out, it will cost them seven percent of what they put in! The penalty will decline to zero after seven years. In other words, my friend's parents will lose money if they want or need to access their funds prior to seven years from now. At ages 75 and 78, this seems almost criminal. 
What if they manage to let the annuity grow without taking money out? Should they utilize the funds down the road, any growth would be subject to tax at ordinary rates. Growth from investments held personally would be taxed at lower capital gain rates. If the annuity passes to their heirs, the ordinary tax on the growth will be payable by them. If my friend's parents had let their funds grow in a taxable account, any amounts passed on to their heirs would avoid tax altogether (because of the basis step-up).
As RIAs, we can't protect everyone. But we can educate our clients, friends and employees in the hope that they will share this warning with their circles. 

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Comments (4)

I agree implicitly with your message.

I think it's important, however, to point that that there a folks like Ameritas and Jefferson Pilot out there that make annuities available WITHOUT annuity surrender charges - and with M&E costs closer to 1/2 percent than those that (when all those useless death benefit riders are added on) can get to 2.5 to 3%.

(They also offer ETFs and no-load funds inside their variable annuities)

Again your message is spot on, ...

BUT sometimes the right "rescue" for those in one of these atrocious vehicles (for example, when it's non-qualified money and simply moving an IRA annuity to an IRA in no-load funds or other no-to-low load vehicles won't do the trick) IS one of the NO-LOAD annuities out there.

And dare I say it ... where the insurance company is sound, it's a fixed annuity, and the liquidity ISN'T an issue, annuities (again ONLY the no-load type) may have their place.

One more time ... , I completely agree with your point, especially in the situation/example you gave ... but the annuity providers out there that offer NO-LOAD products DO provide an alternative that (in SOME circumstances) work out to be the least of the evils.

... especially when the assets were going to the next generation OR a guaranteed income stream is important.

Please don't think I'm disagreeing ... I just think that this is an important (albeit small) qualification.
KLM , June 30, 2014
I agree with your comments. No-load annuities can sometimes be appropriate in particular circumstances. They can present a good alternative for clients who own a commission-based product. Rolling the high cost annuity into a no-load annuity can cut down on annual costs and potentially provide better investment options. Single premium immediate annuities providing lifetime income can be a great solution for an elderly client.
Unfortunately, the vast majority of annuity holders were convinced to buy an inappropriate product by a commissioned salesperson.
SherylCPA , July 01, 2014
Yep, that IS the issue.

And if the even BIGGER "sin" has been committed; buying one of those highly loaded annuities in a qualified product (I see this not only in IRAs but in small business plans, as well) we can rescue them by moving them to no-load funds and get out of the annuity entirely (I typically work through a break-even with the client to see how long we need to leave the money before transferring because most of these have a declining surrender charge).

But when the money is non-qualified, (especially when the amounts are high) then using one of the low cost, no load annuities via a 1035 exchange is really the only choice.

Thanks for your wisdom Cheryl.
KLM , July 11, 2014
I think that when you are talking about annuities you had better make it clear as to what kind you are talking about. As certain annuities in certain situations have been shown to actually extend and liberate monies for seniors in their retirement. I think you are missing the point, what is social security, what is a pension plan - an annuity!
cubby , October 17, 2014

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