The question was: I have a new client, age 58, who owns 5 deferred fixed annuities, non-qualified, purchased in different years. Some have small account values. The client wants to consolidate several or all, for the sake of simplicity, but doesn’t want to lose money in the process. What are some points to cover with him before consolidating?
The answer is: Consolidation for the sake of simplicity is rarely a good motivation for a client who owns annuities. Aside from the consideration that diversity in savings and investments is usually a good thing, there are a number of practical considerations a client should explore before deciding to consolidate.
In order to make an informed decision, the client should ask himself, as well as a financial advisor, a number of important questions:
1. What is the return the client is currently earning on each of the annuities?
Insurance companies typically send annual statements which not only disclose the annual return for each year, but also provide an updated current account value as well as the value if the annuity is surrendered. If the return being earned is competitive compared to other savings plans available, what is the advantage of moving the funds? Annuities, unlike brokerage accounts, do not typically have maintenance fees which can reduce the account value or actual rate of return each year. If the annuity has an uncompetitive rate of return in comparison with other safe money alternatives available, there are even more questions to be asked.
2. Assuming the rate of return is not competitive, what is the cost of surrendering the annuity or exchanging it for a new annuity?
Section 1035 of the tax code allows tax free exchanges of annuities without triggering a taxable event (or tax penalty for the client under age 59 1/2 ). However, if there are surrender penalties under the existing annuity, they are still applied when the funds are transferred. Annuities, being long term savings vehicles, typically have penalties for surrender or early withdrawals during the first five to ten years, depending on the annuity policy. If the annuity in question is beyond the penalty period and is a low performer from a return standpoint, the client might be wise to decide to move the money to a new annuity. If the return is competitive, the client might be wise to keep it.
3. Before making any such decision, a client should ask himself when do I need the money?