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Select Annuities Are Best for Maximizing Tax-Advantaged Investments


By , with Annuity FYI

So, what do you do if you’re among the fortunate folks in the working world who contribute the maximum in tax-deferred accounts and have the will and the means to contribute more?

Some people are more fortunate and have more options than others. If you’re one of them, what do you do if you have contributed the maximum in tax-deferred accounts – $6,000 annually in an IRA and $19,5000 in a 401(k) plan – and have the will and the means to contribute more in a growth-oriented product that is also tax-deferred and poised to produce a meaningful return? 

Growth products are best for many of these folks, even though interest rates have been rising lately because of expectations of a strong economic recovery in 2021 and 2022. But they’re still unusually low. And while the Federal Reserve has said it will start raising rates in 2022 to cool a strengthening economy and an increase in inflation, the increases are likely to be relatively modest because growth next year, while expected to remain strong, will not be as robust. Moreover, growth in 2023 is forecast to be even less so. 

So what kind of product are we talking about? Mostly, the appealing ones have two things in common:

  • They’re usually fixed indexed annuities (FIAs) or so-called buffered annuities, which offer the growth potential of the stock market while protecting against losses totally or partially in a down market.
  • They have a history that shows they are less inclined than the competition to trim so-called index participation rates every year or two, especially in a low interest rate environment.

The latter is especially important because the surrender period on FIAs – financial penalties if you exit the investment prematurely – are typically 10 years. The threat of cuts in participation rates are not lost on prospective FIA buyers. They can be as high as 20%. “People ask themselves, ‘What if I buy a fixed indexed annuity and then the insurance company cuts the participation rate down the line, and perhaps more than once?’”, says one annuity advisor. “This concerns people.”

To this end, here is a short list of appealing FIAs that not only offer a better-than-average deal but also a history of being conservative about trimming participation rates. All are included in Annuity FYI’s Top Annuity Picks list and are underwritten by insurers Athene or Midland National, which fit the bill on both counts. This is not to say they never trim participation rates, but they are less inclined to do so over time.

Also on the list is a buffered annuity – a product that doesn’t sidestep market losses outright but mitigates losses in a down market and offers greater growth potential. It is also an Athene product. All but Athene Amplify, a buffered annuity, are FIAs.

Four annuities that fit the bill:

  • Athene Protector 5. This is for investors who want stock market returns but are willing to be less aggressive in exchange for unusually generous guarantees. It invests in two indexes, including the BNP Paribas Multi Asset Diversified 5 Index, which is only modestly exposed to stocks. Both indexes are balanced frequently to mitigate sharp market declines. If after over five years this annuity’s returns are not in the black, investors still get 7.5% of their investment, net of fees. The participation rate on the BNP index is 70%. It is 57% on the other index, the AI Powered US Equity Index. The minimum investment is $10,000.
  • Athene Accumulator 10. This is for investors who want to maximize returns in the low-volatility BNP index, an algorithm-based index comprised of stock future indexes, bond futures indexes and two commodity indices. It offers a 100% participation rate (and an 80% rate on a five-year investment version of the same index). Low-volatility indexes seldom match the returns of stock market indexes because of less exposure to potentially robust stock market returns. But returns are still respectable and less volatile. The minimum investment is $10,000.
  • Midland National RetireVantage 10 Growth Fixed Indexed Annuity. This is for aggressive investors willing to pay an additional fee in exchange for an extremely generous participation rate on a low-volatility index. For a 1% annual fee, RetireVantage 10 offers a participation rate of 155% on the S&P 500 MARC 5% Index. For this deal, investors also have to invest at least $75,000 and agree to two-year index performance crediting. Those who don’t pay the fee still get a generous 105% index participation rate. And prospective investors can still invest as little as $20,000 for an index participation rate of 140%.
  • Athene Amplify. This buffered annuity makes it easier for some annuity buyers to break into the stock market because, unlike a variable annuity, it offers some downside protection. Buyers are offered both “buffers” and “floors,” and they can pick one or the other with different levels of protection or combine them. A buffer – a 10% buffer is most common – protects investors from the first 10 percentage point decline in the underlying index. The incentive to buy this annuity instead of most FIAs is higher participation rates.

    With a floor, unlike a buffer, owners who choose it would absorb the first 10 percentage point loss in an index in a given year. Athene would absorb all additional losses, if any. Essentially, a floor is catastrophic loss insurance.

    Athene Amplify owners pay a 1% fee. For this, they can invest in the S&P 500, the smaller stock Russell 2000 index or the international MSCI EAFE index – or all three together. If they choose one index, they can invest in it for one year or two years and, in the case of the S&P 500, one, two or six years. If they want to invest in all three indexes, they will have to stay with the investment for six years.

    Athene Amplify customers most typically opt for an investment with a buffer – one uncoupled with a floor – in the S&P 500 index for one, two or six years.

    The minimum investment is $10,000.

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