Putting a variable annuity inside an individual retirement account or qualified plan may seem redundant, given that each of the vehicles offers tax-deferred growth of the investment. But an increasing number of boomers are opting for this strategy. The reason: the annuity’s guaranteed living benefits.

“Many clients who have accumulated sizeable funds [inside a qualified plan or IRA] want to be sure that at least some of the money is locked in and protected,” says Beau Brock, a financial planner and principal of Brock and Associates, Tulsa, Okla. “The closer the client is to retirement, the more attractive the annuity’s guaranteed living benefits become.”

Ted Sadar, a financial planner and principal at Sadar Financial, Akron, Ohio, adds, “What distinguishes the variable annuity from other equity-based alternatives are the guarantees. These are very powerful product features.”

A study unveiled in March by the National Association for Variable Annuities, Reston, Va., reveals that annuities’ income guarantees and insurance benefits are driving most clients to include the products inside qualified plans and IRAs. Financial advisors polled said they placed 42% of annuities they sold into a qualified plan or IRA. Sixty percent of all annuity sales in 2004 were in qualified plans, NAVA says.

Additionally, 70% and 61% of survey respondents, respectively, cited the annuity’s death benefit and the living benefit riders–guaranteed minimum accumulation, guaranteed minimum income and guaranteed minimum withdrawal benefits–among the top three reasons for recommending annuities inside qualified plans or IRAs. Also, 66% of those polled named guaranteed lifetime income as one of the top three reasons.

Not all advisors see the guarantees as worth the extra fees, which can add two percentage points or more to the annuity’s cost. Darius Gagne, a principal at Quantum Wealth Management, Santa Monica, Calif., regards guaranteed-backed annuities as “extremely expensive products with many non-transparent fees.” When the annuity is placed inside an IRA, he adds, the product’s tax advantages also become subject to IRA distribution rules.

However, Kevin Meehan, a principal of CDHM Financial Advisors, Itasca, Ill., says the VAs are increasingly competitive with alternative investments, a development he attributes to increased regulatory scrutiny and bad press in prior years respecting the products’ high cost.

“As variable annuities have become more price-competitive, the spread between the fees paid for the product guarantees and the fees paid to advisors for other investments has grown smaller.”

Most advisors interviewed by National Underwriter say the guarantees offer risk-averse clients the necessary incentive to stay invested in vehicles that offer potential for high returns but also significant market exposure. And several point out that placing one tax-deferred vehicle (the annuity) inside another (the qualified plan or IRA) only makes sense when the annuity’s guarantees are factored in.

Which of the guarantees is appropriate will depend on the client’s retirement planning horizon and liquidity needs. Brock says that most of his clients, boomers in the 50 to 60 age bracket, favor the guaranteed minimum withdrawal benefit to plan for unanticipated expenses or periods of unemployment that can lead to a cash shortfall.

For Kenneth Shapiro, a financial planner and principal of Shapiro Financial Security Group, Hazlet, N.J., the guaranteed minimum income benefit draws greater interest. That’s because most of his clients, recently retired boomers and seniors, have annuitized and place higher priority on generating a steady income stream.

To be sure, advisors don’t see a guaranteed annuity as a catch-all solution for the pre-retirement boomer. While offering protection against market downturns, the products generally feature fewer investment choices than can be had in other equity-based vehicles. Investments that are a particular focus of the high net worth–hedge funds, commodities and REITs–will not be found inside annuities subaccounts.

Depending on the client’s risk tolerance levels, advisors say they usually will recommend supplementing the annuity with non-guaranteed investments inside the qualified plan or IRA. In the event of a market dip, clients can shift withdrawals to an annuity offering the guaranteed minimum withdrawal option, allowing non-guaranteed assets time to recover.

Boomers have to be careful about tapping the annuity prematurely: If they draw down the account before the term stipulated in the contract (generally three years), they’ll lose their guarantees. To minimize the impact of such withdrawals, Sadar counsels establishing multiple annuities inside the IRA or qualified plan. Should the client have to make an early withdrawal against one annuity, the living benefits will remain intact in the others.

“Depending on the investable amount, we’ll probably never use just one [variable annuity] contract,” says Sadar. “Once you trigger the benefits, that impacts the whole contract. But if you have, say, three contracts, each holding $50K, then you have the diversification necessary to meet short-term income needs while keeping living benefits intact for the long term.”