Advertised guaranteed growth, such as “6% guaranteed for 10 years,” is not a guaranteed rate of return that you could withdraw as a lump sum. Instead, the guaranteed growth only determines a floor for future guaranteed withdrawals. Withdrawals are limited to a fixed annual withdrawal amount, subject to restriction, and are generally not inflation adjusted. Since the 6% guarantee can be followed by many years of 0% interest and a fixed withdrawal, average annual yields can be as low as 1% or 2% over the life of the contract.
Most variable annuities being sold with optional benefit riders limit the percentage of the funds you can allocate to stocks in an apparent effort to limit volatility; but also limiting return potential. Even if a variable annuity is designed to mirror an index's performance, annuity expenses can detract heavily from total return as seen in the following hypothetical example for a $100,000 annuity.
Most annuities don’t have a single flat fee rate. Many have several layers of fees that, together, can add up to several percent and thousands of dollars annually. The chart below highlights some common fees and their hypothetical impact on a $100,000 investment in a variable annuity. Often overlooked are the additional fees paid to the subaccount fund companies.
In the early years of many annuity contracts, surrender fees can be high enough to be a significant barrier to withdrawals. A common variable annuity surrender fee starts at 7% and declines over 7 years (6% in year two, 5% in year three, etc.), while some indexed annuities may have surrender fees as high as 20% and surrender fee periods as long as 15 years.
Holding on to an annuity to avoid surrender fees may not be in your best interest. Fisher Investments can work with you to determine if an annuity is the best option for your investment and retirement planning goals and may cover some or all surrender costs.*
The income and realized appreciation on annuity contracts are taxed at ordinary income tax rates (not capital gains rates) which can outweigh the deferred status. U.S. ordinary income tax rates can be as high as 39.6% while current capital gains rates are 15% to 20%.
Unlike other types of financial instruments, most annuities do not receive a step-up in cost basis upon your passing, which could create a larger tax burden when your beneficiaries receive the proceeds. Any gains passed to a beneficiary are also taxed as regular income, not capital gains—if they have a high income tax rate, an annuity may be counterproductive for them.
*Annuity Surrender Fee Terms and Conditions
1. Limited Time Offer: The offer is available for a limited time only. Fisher Investments reserves the right to cancel, suspend or modify the offer at any time and for any reason without notice.
2. Eligibility: The offer is available only to qualified investors who become Private Client Group clients of Fisher Investments and who surrender an eligible annuity, CD, REIT, or mutual fund and transfer the proceeds to be managed by Fisher Investments. Nothing in the offer infers any right on any person to become a client of Fisher Investments. Fisher Investments reserves the right to refuse or terminate any person as a client for any reason. Any request to participate in the offer is subject to acceptance by Fisher Investments.
3. Conditions: (i) The maximum surrender cost that Fisher Investments may agree to pay will depend on the actual surrender cost of the annuity (excluding capital gains and other taxes) and the value of the total portfolio transferred for management by Fisher Investments. Any portfolio already managed by Fisher Investments will be excluded for the purpose of determining the maximum surrender cost to be paid. (ii) Any surrender cost that Fisher Investments may agree to pay will generally be reimbursed in the form of a credit to the Fisher Investments quarterly investment advisory fee. Installments for ERISA plan assets will only be credited to the Fisher Investments’ managed account that contains the ERISA plan assets. Installments are subject to adjustment based on withdrawals of assets from Fisher Investments’ management. All payment obligations will immediately cease if the client relationship with Fisher Investments or the account receiving payment is terminated for any reason before the end of the payment period and no further installments will be paid.
4. Risks: There is no guarantee that any annuity proceeds managed by Fisher Investments will achieve any specified level of performance, or that performance will be any higher than what could be achieved within an annuity. Investing in securities involves the risk of loss. Past performance is no guarantee of future returns.