Annuities and Personal Pension Plans

There are four common types of annuities that we come across in our line of work. The first three are all used for growing your money. The last one is designed to stretch a pile of money into an income for your entire lives. Here are the four types we see most often.

Fixed Index Annuity

The first of the growth annuities we will discuss is a Fixed Index Annuity.

The product is measured against a popular index.  For example, we could use the S&P 500 as the index. This product has a floor. In all Fixed Index Annuities, the floor is 0%.  Since you are not actually buying stock, no matter how poorly the index does that year, the client will not experience any losses. The worst a client can do in one calendar year is 0%.  Each one of these products has a ceiling as well, and ceilings vary from company to company, and product. We are going to use an example of a hard 15% ceiling.

If the index does well in a calendar year, and achieves a 20% growth, the client will receive 15%, the maximum allowed by the ceiling.

If the index does okay, and achieves  an 8% growth, the client will receive all 8%.

If the index does poorly, and receives a loss for the year, the client’s return that year will be 0%.

This product works well for clients who demand the safety of a floor, but want a higher return than CDs, money markets, or bonds provide.
Fixed Index Annuities have no annual fees, unless certain riders are included.

Variable Annuity

This financial product is designed to grow money over several years. It is designed to compete against 401K retirement accounts. Like a 401K, there are significant annual fees associated with this product. The word variable pertains to the products relationship with the market. This product will go up with whatever stocks or mutual funds it is invested in. The client will receive 100% of the growth. However, this product will go down with whatever stocks or mutual funds it is invested in. The client will experience 100% of the losses. This is the most common of the four.  It competes with 401Ks, individual stocks, mutual funds, and stock portfolios. The most important part to remember, the client will receive 100% of the growth and 100% of the losses, plus management fees.

Early withdrawal will result in cancellation fines and potential tax penalties.

Fixed Annuity

This product is designed to compete against a CD that a client can purchase at the bank.

Let’s say the client purchases a CD or a fixed annuity for five years at 3%. These products are guaranteed return of exactly 3%. 
Early termination may result in cancellation fees.

Income Annuity

The fourth type of annuity, Income Annuity, is different than the other three. It is much more similar to the pension that our parents and grandparents enjoyed.  It is more popular with couples approaching retirement age.

Imagine you are a married couple, who has just retired at age 67. You have $500,000 in your nest egg, but you were afraid that if you spend it too quickly, there will be nothing left for you in your golden years. Many seniors are increasingly concerned about outliving their retirement.

An Income Annuity, or Guaranteed Lifetime Income Annuity is a pension that can be bought from insurance companies. In the story, the Client decides to purchase a $500,000 Income Annuity.  And in return, the family will receive an annuity payment, similar to a pension payment, for the rest of their life.  Once they are purchased, they cannot be terminated, so should be researched thoroughly.

If you have assets in your retirement account, but really wished you had a pension, this can be a fantastic fit.

The first three annuities are designed to help people grow money. A Guaranteed Lifetime Income Annuity is different in that it generates a known monthly income as long as the clients live.