Annuities. Long-term investments for your future.

Transcription

1 Annuities Long-term investments for your future.

2 About Stifel Nicolaus Stifel Nicolaus is a full-service investment firm with a distinguished history of providing securities brokerage, investment banking, trading, investment advisory, and related financial services to individual investors, institutions, corporations, and municipalities. Established in 1890 and headquartered in St. Louis, Missouri, Stifel Nicolaus is one of the nation s leading firms. Stifel, Nicolaus & Company, Incorporated is a wholly owned subsidiary of Stifel Financial Corp. Stifel Financial Corp. s publicly traded stock is listed on the New York Stock Exchange under the symbol SF.

3 Should Annuities Be a Part of My Portfolio? More people are asking this question today than ever before. One reason annuities are so popular is that they can allow for tax deferral. With tax deferral, taxes on earnings are deferred until the year they are withdrawn. The main reason Congress granted annuities this benefit was to allow individuals to save more for retirement.

4 The Power of Tax Deferral Let s illustrate the Power of Tax Deferral for annuities. Assume a $100,000 purchase amount with a growth rate of 7%. An annuity would be worth $107,000 at the end of the first year. A taxable investment could have earned the same $7,000 but would have created a tax burden based on the individual s tax rate. To illustrate this example, we ll assume a 28% rate. Thus, the individual with the taxable investment must pay $1,960 in taxes at the end of the year and only has $105,040 to reinvest for the next year. For year two, the annuity earns $7,490 ($107,000 x 7%). The taxable investment produces only $7,353 ($105,040 x 7%) and creates a tax bill of $2,059, leaving only $5,300 to reinvest for the next year. At the end of year two, the annuity is worth $114,490 and the taxable investment $110,334. The real benefit is that, over time, the taxdeferred annuity can accumulate more funds and produce greater retirement income. This hypothetical illustration also shows that even if the tax-deferred ending value was withdrawn and taxes paid, the annuity would still be ahead of the taxable investment. At the end of 15 years, a tax-deferred value of $275,903 minus taxes of $49,253 ($175,903 x 28%) equals $226,650, or $17,566 more than paying taxes along the way. It is important to note that this example does not take into account the fact that annuities may have fees associated with them that taxable investments may not have. Annual contract charges, administration, and mortality expenses are not reflected in this example and will lower the annuity s return. Certain taxable investments 2

5 may have more favorable tax rates, which would reduce the difference in value between the taxable and tax-deferred accounts. Changes in tax rates and tax laws may also impact the comparative results. Investors should consider their personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision, as these may further impact the results of the comparison. The important point is that with annuities, the contract owner decides when to withdraw income and therefore has control over when he or she will pay taxes. years held taxable value tax-deferred value 5 $127,871 $140, , , , , , ,968 With a tax-deferred investment, earnings are taxed upon withdrawal and a 10% penalty tax may apply for withdrawals prior to age 59 1/2. The above assumes a 7% growth rate, and a 28% tax bracket. This is a hypothetical illustration only and does not reflect actual performance of any particular investment. The main reason Congress granted annuities this benefit was to allow individuals to save more for retirement. 3

6 Other Benefits Most annuities do not have an upfront sales charge. This allows more of an individual s invested dollars to go to work immediately. The insurance company may charge a surrender fee if the contract is not held a minimum length of time, usually five to seven years. Also, unlike IRAs, the money does not have to be withdrawn at age 70½. When funding an annuity, there are no restrictions on how much an individual can put into an annuity. Insurance companies issue fixed or variable deferred annuities that allow individuals to enjoy the benefits of tax deferral. Another type of annuity immediate annuities provides tax-advantaged income. Depending upon an individual s objectives, he or she may purchase either a fixed or variable contract with either the deferred or immediate annuity. Fixed Annuities In a deferred fixed annuity, the insurance company credits an individual s contract with a set interest rate for a defined number of years. Similar to other fixed income products, the risk is low to the individual but returns are moderate. The best contracts on the market today allow individuals to choose the exact number of years they want with a set rate for the entire term. For example, a five-year contract pays 5% each year, and at the end of the fifth year, the client can take the funds out without any contract penalties. Variable Annuities A deferred variable annuity offers an individual the opportunity for higher returns. This is achieved by the individual accepting the investment risk for the funds put into the contract. A variable annuity allows an individual to choose how the funds are invested by having 4

7 separate subaccounts in the contract. Each subaccount is managed by professional money managers, who invest the dollars according to specific investment objectives. These subaccounts can include: aggressive stock funds, blue chip stock funds, utilities stock funds, bond funds, balanced funds, international funds, and more. The returns on the subaccounts will vary by the different investment objectives assumed by each subaccount. Variable annuities also allow individuals to transfer funds between subaccounts and not incur taxable consequences for the moves. Many variable annuities offer a guaranteed death benefit. This feature generally provides your beneficiaries with the greater of: 1) the value of your investment or 2) your premium payments minus any withdrawals. In addition to this feature, some annuities allow you to lock in a stepped up death benefit based on the annuity value on a specified date. Other annuities even guarantee to increase your death benefit value by an annual fixed percentage, most commonly 5%. Variable annuities are one of the few investments that can provide income for life (or for the lives of both spouses). Many variable annuities offer optional benefits commonly referred to as lifetime income benefits. These benefits provide a guaranteed minimum income in down markets and the potential for higher income if the value of the annuity investments increase. These features are commonly combined with the flexibility of systematic withdrawals so that you may start or stop your income at any time. There may be conditions, limitations, and restrictions associated with a particular death benefit or lifetime income rider. Also, there may be other types of variable annuity optional benefits available suited to meet your needs. You should consult with your Stifel 5

8 Nicolaus Financial Advisor to understand the details of a specific variable annuity and optional benefit to see if it is right for you. Immediate Annuities Immediate annuities generate income as soon as they are purchased, providing individuals with income for either a set time period or for life. Thus, an immediate annuity can provide income that you cannot outlive. Monthly payments from immediate annuities are considered tax-advantaged income. Each payment consists of interest and a return of original principal. The portion that is original principal is not taxable. Therefore a percentage of each payment for the duration of the contract is tax-free. This is called an exclusion ratio and will vary by the individual s age and type of contract purchased. Immediate annuities can be either fixed or variable. Fixed immediate annuities provide a fixed dollar amount for a set number of years or for the remainder of the owner s life. Variable immediate annuity payouts will change over time based on current stock market conditions. Variable immediate annuities may be able to provide a rising income stream over the life of the contract. As with most investments, however, variable immediate annuities involve risks that may decrease the income stream. Withdrawals From Your Annuity Annuities are long-term financial vehicles designed for retirement purposes. All withdrawals of taxable amounts, including earnings, are taxable as ordinary income. Withdrawals may be subject to surrender charges, and if made prior to age 59½, may be subject to a 10% federal tax penalty. 6

9 Exchanging Contracts It is important to know that the government allows individuals to move an annuity to a different insurance company and maintain the contract s deferred earnings. This is referred to as a 1035 exchange, so named after the Internal Revenue Code number This exchange option is very important to the consumer and helps keep the marketplace competitive. For example, suppose an individual purchased a five-year fixed annuity from an insurance company. At the end of the fifth year, the renewal rate offered by the company was lower than another company s rate. The individual can have the entire proceeds from the first company sent directly to the second, thus obtaining the higher rate without incurring a taxable event. One can exchange a fixed contract to a variable or variable to fixed or even take life insurance cash values and transfer to an annuity. The exchange privilege allows individuals flexibility and helps the annuity meet their changing needs over the years. Before switching annuity products, you should compare both annuities carefully. There may be surrender charges on the current annuity, and the new annuity will begin a new surrender charge period. You should also compare fees between the two products. Investing in your portfolio wisely may help you reach long-term financial goals. 7

10 Advantages of Annuities Consider this: The power of tax deferral works to produce larger retirement assets. You gain control over when your earnings become taxable. Generally, you have no upfront sales charges. Annuities can provide a death benefit to guarantee your heirs your principal and can provide guaranteed future income for current owners. Annuities can provide monthly income for the rest of your life. Annuities deserve serious consideration for your long-term savings. Your Stifel Nicolaus Financial Advisor has the knowledge and service to be an invaluable resource in developing and implementing your investment plan. Investors should obtain a prospectus for an annuity s contract and the underlying subaccounts and consider the investment objective, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other important information, is available from your Financial Advisor and should be read carefully before investing. Variable annuities are not insured by the FDIC or any government agency and involve market risk, including the possible loss of principal. Variable annuities are suitable for long-term investment and entail fees, such as mortality and expense charges and optional benefit rider charges. Variable annuities purchased within an IRA offer no additional tax benefits than those already available through the IRA. Guarantees are based on the claims-paying ability of the issuing insurance company. 8

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