Non-qualified variable annuities are designed to play a part in long-term retirement planning. You get tax-deferred growth on your investment earnings, and you can choose the way your money is allocated among the investment portfolios offered by the annuity contract you select.
What distinguishes variable annuities from other retirement planning tools are:
- The opportunity to receive lifelong income
- The guaranteed death benefit that protects your premiums and may also offer investment gains for your beneficiaries
- The ability to change investment portfolios without taxation
- The flexibility to decide how much to contribute, how to allocate the money in your contract, and when to begin taking income
What’s more, you don’t need to have earned income to put money into non-qualified variable annuities, as you do with an IRA or an employer-sponsored qualified plan. Investments in non-qualified variable annuities are not tax deductible.
Choosing Your Direction
Buying non-qualified variable annuities involves making choices, but also gives you some control over your retirement savings.
The more you know and understand about how non-qualified variable annuities work, the more informed choice you’ll be able to make in selecting the best annuity contract for you, as well as appropriate portfolios within the contract.
Of course, you can also buy a fixed annuity and not make any additional decisions, especially if you’re making a one-time purchase, feel overwhelmed by financial matters, or who are looking for a stable, guaranteed source of income.
But if your preference is to stay attuned to what’s happening with your investment portfolios, variable annuities give you the opportunity to allocate your assets, monitor their performance, and change that allocation when it seems wise.
You allocate non-qualified variable annuities premiums among different portfolios managed by a team of specialists, who make buy and sell decisions based on extensive research. That means you don’t have to shoulder all the responsibility for that level of decision-making.
While past performance does not guarantee future results, you should, however, evaluate the past performance of these portfolio managers in making your investment decisions, as well as evaluating the performance of the portfolios themselves.
You should also consider the investment objectives, fees and expenses of the portfolios before investing. The prospectus contains this and other important information and may be obtained from your financial advisor.
Flexible Time Lines
Another advantage to non-qualified variable annuities is that there are fewer rules about how long you can add money and when you must withdraw it. With most qualified retirement annuities, you can put money in only as long as you have earned income, and there are limits on how much you can put in.
In addition, you must begin taking income in the year after you turn 72. But with non-qualified variable annuities, you can continue to build the account whether or not you’re earning income, and you can typically postpone withdrawals to age 80 or later.
With a variable annuity, you can allocate your money however you like, usually on a percentage basis. As an example: 10% in an aggressive growth stock portfolio, 15% in a growth stock portfolio, 32% in a growth & income portfolio, 28% in an income portfolio, 10% in an indexed portfolio, and 5% in a money market account.
Each time you add money, you buy a specific number of accumulation units, or shares, based on the net asset value (NAV) of the investment portfolio you’re putting your money into, adjusted for the annuity mortality and expense risk fee, or M&E, and any other (asset-based) fees that may apply.
As a result of providing individual control over retirement savings, variable annuity contracts are more flexible and as a result more complex than fixed contracts. In exchange for giving you more options and choices, they require you to make more decisions.
Management of Risk and Reward
As with any equity investment, you risk a loss of principal with variable annuities. But equity investments also offer greater potential for long-term reward and, equally important, better protection against inflation.
The key, of course, is the long-term commitment you make. While it is true that in some periods a fixed annuity might show stronger gains than a stock portfolio, historically the longer that money is in equities, the greater the potential for growth. (Past performance is no guarantee of future results.)
The principle of diversification, which means that your investment portfolios are invested in many different companies, industries and perhaps countries, helps protect you against sustained losses in a single stock or sector of the market. What it can’t protect you against, however, is that a particular portfolio of equities might not provide the level of performance you hope for.
Traditionally, variable annuity investments have outpaced inflation in two ways:
First, your earnings are taxed deferred and with the full amount of your earnings re-invested, your account should grow at a quicker rate. Taxes are paid when you eventually begin taking income.
Second, with variable annuities you may be able to leave some or all of your retirement savings in growth accounts even after you begin to take income. That means the payments you receive can increase over time—though of course they can also decrease if investment performance goes down.
Re-Allocating the Allocations
You create the asset mix that you’re comfortable with, either at different stages in your life or in different economic conditions. The flexibility of variable annuities lets you share in the benefits of a strong stock market, or move money into more stable accounts if you’re concerned about preserving your gains as you get closer to retirement.
No one mix suits every investor, though many investors emphasize stock portfolios, since historically they have provided the strongest returns over the long term, and thus the greatest opportunity for growth. Of course, no one can predict future growth.
An advantage of putting money into variable annuities is the insurance protection they provide.
- The guaranteed death benefit to protect beneficiaries against market downturns
- The right to choose a payout option that provides a guaranteed income you can’t outlive
- The guarantee that the fee that pays for this insurance will not increase
- All guarantees are based upon the claims paying ability of the insurer