Fixed Indexed Annuities to Hold ‘Bright Spot’ in 2015

Expect a ‘continued shift’ of annuity purchases in the new year toward principal-protected and income-producing products, says IRI

Assets will continue to flow into fixed indexed annuities in 2015, IRI says. Assets will continue to flow into fixed indexed annuities in 2015, IRI says.

Fixed indexed annuities will continue to be a “bright spot” for the annuity market in 2015 and the industry can expect a “continued shift” of annuity purchases in the new year toward principal-protected and income-producing products, as baby boomers confront their retirement realities.

So says the Insured Retirement Institute’s State of the Industry Report, released Dec. 16. The report also noted that next year, interest rates could experience a “significant uptick” above the critical 3% level, which could drive “a resurgence of product development and marketing efforts on the variable side, but in the interim, demographics favor continued migration toward guarantees of both principal and income.”

Fixed indexed annuities, however, will continue to be a bright spot in a persistently low interest rate environment, the IRI report stated, as both a retirement savings accumulation vehicle offering a principal guarantee and growth potential, and as an attractive alternative to certificates of deposit.

“Fixed indexed annuities and immediate and deferred income annuities are showing especially strong growth as the industry is poised to begin 2015 in a strong financial position and with favorable public policy support,” said Cathy Weatherford, IRI’s president and CEO, in a statement.

Ken Nuss, founder and CEO of AnnuityAdvantage, added in a statement that because fixed annuities are not subject to stock-market-based losses and the issuing insurance company provides contractual guarantees, fixed indexed annuities are among the safest and best choices for funding retirement.

“Fixed indexed annuities can provide retirees with one of the most reliable and efficient sources of retirement income,” said Nuss. “Savvy savers have long understood the merits of indexed annuities, but now a broader cross section of the investing public has entered the marketplace in droves. With the economy still on shaky ground, many near retirees worry they’ll be working much longer than anticipated. Fixed indexed annuities are a virtually recession-proof bulwark against those kinds of concerns.”

Nuss noted several key advantages of fixed indexed annuities: They offer a guaranteed minimum surrender value for the duration of the contract term, and interest earnings during the accumulation phase are tax deferred until the owner begins making withdrawals.

While some financial planners might advise against indexed annuities before the age of 40, Nuss argued that “it’s never too early to consider an alternative to the conventional wisdom of retirement planning.”

Said Nuss: “Provided that one can avoid depositing funds that might be needed for living expenses or emergencies, there’s no reason not to purchase a fixed indexed annuity at the start of one’s career as opposed to the middle or the end. A distinct advantage of buying early is that compounding over a longer term results in larger payments during retirement.”

Weatherford added in her statement that income planning advice and guaranteed retirement income solutions tailored to meet consumers’ demand will be of utmost importance in the New Year, “as Americans become more aware of their retirement income needs. The industry, she said, “is presented with the tremendous marketplace opportunity to innovate and develop new products to match the increasing demand for insured retirement products.”

Indeed, 2013 and 2014 were not “significant” growth years for the industry as a whole, with sales beginning to shift away from variable annuities and toward fixed products, with fixed indexed annuities and immediate and deferred income annuities “showing especially strong growth,” IRI said.

Fixed annuity sales were up 25.6% as of the third quarter year-to-date in 2014 versus the prior year-to-date period, while variable annuity sales have remained relatively flat, slipping about 2.5% in the third quarter year-to-date.

Variable annuity net assets reached a new all-time high during 2014, exceeding $1.90 trillion at the end of the third quarter.

Industry-wide annuity sales were on track to increase 3% to 5% in 2014, reaching or exceeding $225 billion, the highest level since 2011.

Deferred income annuity sales, which have more than doubled to $2.2 billion in 2013 and will likely exceed that level in 2014, will continue to increase in 2015 in light of the Treasury Department’s new Qualifying Longevity Annuity Contract (QLAC) rule, IRI stated. Treasury adopted the QLAC rule to improve accessibility and usability of DIAs in qualified retirement plans, including individual retirement accounts.

Under the new QLAC rule, the value of longevity annuities that meet the conditions specified in the rule will be excluded from the account balance used to determine required minimum distributions.

The number of companies offering DIAs has doubled since the start of 2012. As the end of 2014 approached, companies began announcing DIA products modified or designed for use in conjunction with QLAC, IRI’s report said.

The annuity industry will also be watching to see when the Department of Labor will move forward in the new year with its lifetime income illustrations proposal as well as its efforts to revise the selection and monitoring of annuity provider safe harbor, IRI said. The Treasury Department will also “look to finalize” next year its pending partial annuitization proposal.

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