RETIREMENT
says Toby Leonard , head of product development at Security Benefit in Topeka , Kan . “ But now we are seeing clients extend their MYGA guarantees to seven years or more .”
Surrender Charges
Another caveat for potential swappers is that most annuities have a surrender period lasting six to eight years after you purchase them , which means you can ’ t sell them or take a substantial withdrawal without incurring a hefty fee . These early-surrender charges would reduce the value of exchanging for a higherpaying contract .
But , as was the case with Branning ’ s client , that ’ s not necessarily prohibitive . “ It may be worth paying the charge if there is a large enough difference in return ,” says Michael Finke , professor at the American College of Financial Services in King of Prussia , Pa .
Surrender charges often decline over time as well . The older the annuity , the smaller the hurdle .
That means advisors must perform a careful analysis to determine whether the swap is cost-effective . “ Look at the amount of lifetime income the current contract provides versus how much lifetime income could be provided by moving the contract value , net of surrender charges , to a new annuity with a higher payout rate ,” says Wade Pfau , author of the Retirement Planning Guidebook , in an email . “ If the new guaranteed income is greater , it might be worth doing .”
Beware Market Value Adjustments
But with annuities , nothing is ever quite so simple . “ Even if you have a noor low-surrender-fee annuity , there could still be a market value adjustment ,” says David Blanchett , Lexington , Ky . -based head of retirement research at PGIM , the investment management group of Prudential .
When you buy an annuity , he explains , the insurance company that issued it invests the lion ’ s share of your premium in bonds . Today , with higher interest rates , those older bonds have lost value . So if you surrender your old annuity now , you might get less for it than what you bought it for .
“ Given the rise in rates , the market value adjustment could have a significant negative impact on the economics of the exchange ,” says Dave Byrnes , head of distribution at Security Benefit .
If you buy a newer model , you might also lose some of the bells and whistles you got on older ones . “ Some of the older annuities may have long-term-care riders that are not available on the newer plans ,” says Jennifer Kim , a managing senior partner at Signature Estate & Investment Advisors in Los Angeles .
You must assess “ where the client is today versus when they purchased their existing annuity . It ’ s possible their risks and goals have changed .”
— Brett Bernstein
What ’ s more , many of the living benefits on older variable annuities had “ such rich benefits , due to overly optimistic pricing expectations , that they still offer much better income and investment flexibility than you can get on a VA today ,” says Scott Stolz , a managing director at iCapital Solutions in St . Petersburg , Fla .
Also consider that if you buy a new annuity , you ’ ve reset your surrender period . “ You will have a new surrender charge schedule based on the new annuity contract ,” says Richard Anzelone , a managing partner at StrategicPoint Investment Advisors in Providence , R . I . That means clients should consider whether they might need this money sooner than the new surrender period allows , he says .
The quality of any annuity provider must enter into the calculation , too . “ Insurance carrier strength and ratings should always be an important consideration ,” says Ashton Lawrence , director and senior wealth advisor at Mariner Wealth Advisors in Greenville , S . C . You don ’ t want to buy an annuity from a carrier that ’ s likely to default .
Reasons To Trade
Nevertheless , it might still pay off for clients to trade in their annuities . “ Much like a decision whether or not to refinance a mortgage , it comes down to the cost to exit the old versus the time to realize the advantages of the new ,” says Frank O ’ Connor , vice president of research at the Insured Retirement Institute in Washington , D . C .
Brett Bernstein , CEO and co-founder of XML Financial Group in Bethesda , Md ., says you must assess “ where the client is today versus when they purchased their existing annuity . It ’ s possible their risks and goals have changed .
“ If it is all aligned , then it may make sense to consider a 1035 exchange ,” Bernstein adds , referring to the section of the tax code that allows tax-free swapping of an existing annuity or life insurance policy for another of the same type .
Finke notes that salespeople are encouraged to help clients evaluate the benefit of comparison shopping . But , he warns , “ Commission-compensated agents are incentivized to recommend switching .”
In any case , most clients are not currently considering annuity swapping . Even though higher interest rates have driven record-breaking annuity sales overall ( according to data tracker Limra ) most of that has come from new buyers , not trade-ins .
“ We have looked at this extensively , and we do not see signals of significant exchange activity ,” says Todd Giesing , assistant vice president and head of Limra Annuity Research in Windsor , Conn .
And yet that might be a missed opportunity . “ Many annuity companies are offering fixed rates that are higher than U . S . Treasurys and other fixed-income instruments ,” says Christopher Van Buren , a private wealth advisor at LVW Advisors in Rochester , N . Y .
50 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2023 WWW . FA-MAG . COM