Immediate and Deferred Income Annuities are Especially Attractive Today
Let’s dive into the top income producing immediate and deferred annuities on the market.
Things change relatively often in the annuity world and, sometimes, for the sake of variety, insurance companies go out of their way to offer unusually good deals on select types of annuities. This has happened in the past with fixed index annuities (FIAs), plain vanilla fixed annuities (so-called MYGAs, or multi-year guaranteed annuities), and others.
Now it’s occurring – at least for a little while – with immediate annuities and closely related deferred income annuities, and this is an ideal time to take a look at the best of them.
Their rates are unusually generous – better, for instance, than most FIAs – which historically isn’t the case. In addition, this remains a difficult period for the stock market and likely to remain so as the Federal Reserve continues to hike interest rates to combat inflation. So for folks who might have been interested in tip-toeing into the market via a different type of annuity – say an FIA or a buffered annuity – these are tough times, especially if you want your investment to deliver the goods quickly.
Indeed, speedily putting money to work – and in a product that is guaranteed to produce – is what immediate annuities (formally named single premium immediate annuities (SPIAs)) – are all about. An immediate annuity makes a one time lump-sum contribution to an insurance company that is then converted into a stream of income for a specified period of time or for a lifetime. A deferred income annuity, a sister product, is much the same except that the investment delays activation for an extended period. This means investors get bigger regular payments for the same amount of money, a reflection of their shorter lifespan.
“Immediate annuities, in particular, are good for anyone who has non-discretionary expenses that aren’t covered by other reliable sources of income, such as a pension,” says one annuity specialist familiar with this product. “Monthly income used to cover essential monthly expenses should be guaranteed, not subject to market risk.”
Immediate and deferred income annuities can be purchased for as little as $10,000 or $20,000 but most people invest markedly more because such sums obviously don’t generate much of a payout over a sustained period of time. Most clients invest at least $100,000.
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The best immediate and deferred income annuities today offer guaranteed payouts of as much as a half percentage point higher than the most generous FIAs, even with the inclusion of a death benefit. That’s a big difference given that the payout differential between different products is normally only five or 10 basis points.
As an example, a 65-year-old man living in Florida could today buy a top immediate annuity paying out more than 6.9% annually, compared to 6.5% among the most generous FIA payouts. A 65-year-old Florida couple with joint coverage can receive up to a 6.3% annual payout, compared to 6% for a joint FIA.
The story is similar in California, another highly populated state. There, the difference in payouts for couples is minimal between immediate annuities and FIAs. It’s a different story for Golden State singles, however, where a 65-year-old man can collect a 6.8% annual payout for an immediate annuity, compared to 6.5% for an FIA.
The differences between FIAs and deferred income annuities, meanwhile, isn’t nearly as significant as the former comparisons. But the payouts today are very close. Historically, by contrast, FIAs usually held the winning hand.
Another bonus point for immediate and deferred income annuities is taxation. Over a long period of time, taxes on their payouts are roughly the same as other types of annuities. Nonetheless, taxes are lower throughout most of the ride because of the so-called exclusion ratio, which in non-qualified accounts taxes only the growth in the investment, not principal. For technical financial reasons, there is no such interim tax break in FIAs.
To be sure, immediate annuities are not for everybody. For one thing, not every annuity buyer wants to receive income almost instantly, sometimes for good reason. FIAs, for instance, frequently offer handsome bonuses to folks who delay taking payouts, so-called roll ups, giving insurance companies the opportunity to earn more money.
A bigger drawback is that investments in immediate annuities and deferred income annuities are irrevocable. Unlike immediate annuities, FIAs and other annuities have the leeway to, for instance, change from a single contract to a joint contract or vice-versa.
On the other hand, many folks don’t care about this, comfortable and rock solid about what they want. And most annuity buyers never wind up changing annuity particulars.
Most important, many prospective annuity buyers like to maximize their returns with as little risk as possible – or no risk at all. If that is the case among the ranks of annuity shoppers, there is no question about it: This is clearly the time to analyze immediate and deferred income annuities. Annuity shoppers have something to gain and nothing to lose.
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