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The
Inside Story of Deferred Annuities Part 2 Michael
P Haubrich, CFP |
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The topic of deferred
annuities that I introduced in this column last month generated quite a
reaction. While I received positive comments from respected accountants,
attorneys and trust officers, those expressed by a local radio show host and
self-proclaimed top seller of annuities in the state were, as one might
expect, less favorable. So intense was this salesman’s reaction to my
exposing the less attractive side of deferred annuities that he dedicated two
entire episodes of his broadcast attempting to discredit my stance on this
subject. In
the more than a decade that I have been writing this column, I have never
received such attention! I was, in fact, so compelled by this reaction that I
thought I would check in with some colleagues to see if this was a common
occurrence or simply an anomaly. What I learned was rather shocking. It seems
that anyone who goes public about the misuse of deferred annuities had best
prepare for a barrage of opposition from those who make their living selling
these products. Tom
Wargin, a Milwaukee based fee-only financial
advisor, shared his experience of receiving hate mail and nasty phone calls
from agents after he was quoted expressing similar criticisms of the misuse
of deferred annuities. Wargin, both a Certified
Financial Planner and a Chartered Financial Analyst, was accused of not understanding
investments, which is far from reality. Jeff Opdyke,
a personal finance reporter for the Wall Street Journal who has written
numerous articles on this subject shared that “any time any of us write about
sales tactics with annuities or the usefulness of certain types of annuities
for certain types of investors, we are barraged with hate mail. It’s par for
this particular course.” So risking further
attack, I pose the question: is the misuse of deferred annuities really a
problem? According to the Joint U.S.
Securities and Exchange Commission/National Association of Securities Dealers
Report on Variable Insurance Products (variable annuities and life) June
2004, “high commissions drive sales of these products. Variable insurance
products have higher fees and surrender charges than mutual funds …combined
with other factors make variable insurance products inappropriate for many
investors.” Paul Roye, SEC director stated “Make no
mistake; there is a problem with the sale of variable products.” In the limited space
of this column, it’s not possible to cover all the considerations relevant to
deferred annuities. It is always recommended to work with your financial
advisor on strategies that meet your particular financial planning
objectives. However, I stand by my original comments about the potential
misuse of this product. The use of deferred annuities in a retirement account
such as an IRA or 401k rarely makes sense as a financial planning strategy. Before capital gains
and dividend income tax rates were reduced a few years ago, investing in
deferred annuities outside of a retirement account (for income tax deferral) did
make a lot of sense. But today the maximum tax rate on capital gains and
dividends is at 15 percent. Deferred variable annuities (which invest in
stocks) defer the taxation of capital gains and dividends until withdrawn and
then the tax treatment of the gains are taxed at ordinary income tax rates
which are as high as 35 percent. That’s more than double the tax rate of
capital gains. Even for low income taxpayers, the capital gains and dividend
tax rate is lower than ordinary tax rate – 5 percent compared to 10-15
percent. If you currently own
deferred annuities, investigate the imbedded costs and consider your options.
There are low cost variable annuity alternatives (not sold by
commission-based agents or brokers) with less than half the average annual
fees and no surrender charges that you can exchange for your existing annuity
tax-free. Be sure to calculate surrender charges or costs you may incur along
with any forfeited death benefits your existing contract has before making a
change. Before purchasing a
deferred annuity, you need to learn as much as possible on how they work, the
real benefits they provide, and the total expenses you will pay. Then you can
make a decision based on full knowledge, not salesmanship. I recommend
seeking unbiased advice from a financial advisor who is not in the
business of collecting commissions from selling annuities. Check out www.toyourwealth.com
for additional links to consumer oriented sites on deferred annuities. Mike Haubrich is president of Financial Service Group, a
registered investment advisory firm in |