Variable annuities are financial products that are sometimes confusing and oftentimes controversial. If variable annuities are suitable for your investment portfolio, make sure to pick the option that is best for your needs while also being highly rated by experts and third-party reviewers.
At their core, most variable annuities (VAs) are actually managed pools of assets, wrapped with a life insurance benefit. NASDAQ reports that the inclusion of the life insurance feature is essentially a legal maneuver, making it possible to defer taxes on the assets' earnings. In the case of many, but not all VAs, the insurance company guarantees a stream of income for a fixed period, sometimes even for life.
This guaranteed income stream may be the calling card that draws so many to invest in VAs. According to Kimberly Lankford, a financial columnist for Kiplinger's, "Variable annuities are popular among people who have a gap between the expenses they expect to have in retirement and their lifetime sources of income. An income-generating annuity fills that gap." These investors are typically in their 50's or early 60's and planning to retire in the next five to ten years.
A Sampling of the Best
Because variable annuities are, in fact, so variable, many experts are hesitant to recommend which ones they believe are the best. While Ms. Lankford declined to comment on specific products, her article, Variable Annuities Without the Guesswork, highlights Fidelity and Vanguard offerings. Both Barron's and Weiss have reviewed a large assortment of VAs and arrived at lists of best variable annuities. Fidelity and Vanguard products are highlighted in all three articles.
Fidelity VA's may be a good option for people in their mid-50's to 70's who are looking for a quick payout. These products are attractive for their low fees and relative simplicity. In particular, Fidelity's Personal Annuities contain 59 sub-accounts and a five-year average return of 6.39 percent, according to Barron's. Weiss Ratings gives Fidelity an "A-."
For those who have the luxury of more time before they need payouts, the Fidelity.com may be a good choice. The payout is calculated on a base that never shrinks, even if the sub-accounts perform poorly. Conversely, payouts may increase and be locked in at a higher level if the assets perform well.
Both Weiss Ratings and Barron's included the Intelligent Variable Annuity, from TIAA-CREF (Teachers Insurance and Annuity Association - College Retirement Equities Fund), on their best lists. This VA has five-year annual return rate of 8.77 percent and contains 51 sub-accounts. Weiss gives TIAA CREF an "A" rating.This annuity offers you the option of receiving payments for life or a higher payment for a fixed period.
The Pacific Odyssey VA, from Pacific Life, is included on Barron's list and on Weiss' list of best VA's with guaranteed withdrawal benefits. Its five-year average return rate is 7.25 percent, and it contains 65 sub-accounts. Weiss gives Pacific Life an "A" rating. This VA offers an optional death benefit, but it does not offer a lifetime income option. Retirees may not continue to receive payouts after they reach the age of 90.
As Ms. Lankford points out, "Variable annuities are highly nuanced financial products." Finding the best one often means finding the one that's best for you. Even so, there are some key things to look for in the search for best variable annuities.
Look for Reasonable Fees
Most VA fees fall into four categories:
The mortality and expense charge, also known as the M&E fee, is required for the annuity itself. Typically this charge runs 1.5 percent or more.
Fees for guaranteed income streams range from 1.5 to 1.75 percent.
Surrender charges may be incurred when an investor needs to pull money out of a VA before a pre-determined amount of time has passed. These charges may be up to seven percent of the account balance, but they decrease annually.
Each individual sub-account within the VA often carries its own fee structure, in addition to the other VA fees. These may exceed one percent.
These fees are normal and customary, but it is important to understand them thoroughly before investing.
Read the Rules
Each VA that includes an income guarantee comes with its own unique set of of rules. Like fees, it's important to clearly understand all the rules governing the guaranteed income stream. Considerations include:
- Know how much you are paying in exchange for the guarantee.
- Understand how the income stream is calculated. Most people are accustomed to locking in minimum guaranteed levels of income, but if the assets perform well some VAs will all so let you lock in higher income levels.
- Different funds within a VA also calculate guaranteed income independently.
Consider Asset Performance
It's important to compare how the assets within a VA have performed over past years, because that is a good indicator of future performance. "Performance, however, is only one piece of the picture," Ms. Lankford points out. If the goal is to have a guaranteed stream of income during retirement years, how those guarantees are calculated is a big factor.
Research Before Deciding
Variable annuities are long term investments, so allow yourself the time it takes to find the right one. Work with highly rated life insurance companies, and confirm that you can easily reallocate funds between various sub-accounts, at no cost.
Complex Financial Products
Variable annuities are complex financial vehicles. Speak to your financial advisor to help you decide if variable annuities are right for your financial situation.