Although annuities are the only financial products specifically designed to generate a guaranteed lifetime stream of retirement income, few retirees currently use annuities for this purpose, says Cerulli Associates.
In a new report on the annuity future, the Boston research firm does find some positives ahead, however.
For instance, Cerulli said growth prospects are “optimistic” for qualified variable annuities (which accept rollovers from 401(k), individual retirement account and other tax-qualified retirement plans).
“Asset managers, in particular, anticipate very strong growth” in these VAs, the report adds, noting such VAs won a rating of 6.2 on a 7-point scale. The report also says nonqualified fixed annuities have growth potential.
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Even so, there are several obstacles that need to be overcome, even where qualified VAs are concerned, says Lisa Plotnick, associate director at Cerulli and lead writer of the report. These include:
Tax-deferral. Many advisors continue to position annuities for the tax-deferral properties, Plotnick says, which will impede their use in rollover scenarios.
To overcome this, the industry should focus on positioning VAs for their income properties, she says. The rise of living benefit features in VAs is helping this along, she points out, noting that 67% of advisors surveyed by Cerulli in 2007 cited these features as highly important, up from 62% in 2006.
In particular, the guaranteed minimum withdrawal benefit has helped advisors view the VA as a product to use for income purposes, Plotnick says.
“Even executives who don’t like the GMWB concept actually praised it, in our survey, for getting advisors and consumers to think about using annuities to generate guaranteed lifetime income,” she says.
“They see the GMWB as similar to systematic withdrawal plans, which are something with which people are already familiar,” she adds.
The presentation of annuities. Too often, annuities are still being presented in “product pitches” that position the annuity as a stand-alone purchase, says Plotnick. The Cerulli report advises avoiding such pitches “as much as possible, particularly when expanding the advisor pool.”
Instead, present the annuity along with other products, as part of a holistic solution for the customer, suggests Plotnick.