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Which Annuity Provides the Most Retirement Income? It Depends

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New research by Cannex found that annuities with withdrawal guarantees are competing with income annuities, and that, when comparing which type of annuity will provide the highest guaranteed income in retirement, it depends on a number of factors.

According to the research, different types of annuities with equivalent benefits provide higher income guarantees depending on when income is taken, the gender of the policyholder and whether it is for a single person or a couple.

The study, Guaranteed Income Across Annuity Products: Withdrawal Guarantees Compete with Income Annuities, compared income from four types of annuities — single premium immediate annuities, deferred income annuities (DIAs), variable annuities and fixed indexed annuities (FIAs).

The study found that SPIAs provide the highest income guarantee for those planning on drawing immediate income.

For a couple of different ages, the study found that a variable annuity with guaranteed income may generate the highest annual payments.

For an individual looking to start drawing down money in five or 10 years, the research shows a fixed indexed annuity provides a greater guaranteed stream of income than either a deferred income annuity or variable annuity.

For women, the differential between a fixed indexed annuity and a deferred income annuity is even greater because DIA benefit payments are lower based on longevity expectations, the report explains.

The longer the delay in taking income, the greater the benefit for women of choosing an FIA versus a DIA.

“Based on a $100,000 premium investment in a DIA at 65 years old, a woman of average projected longevity would receive, after 10 years deferral, around $11,700 in annual income, versus approximately $12,900 for a man,” the report states.

By contrast, an FIA could generate as much as $14,313 of annual income regardless of gender, the report states.

“Using our quantitative tools to compare different types of annuities across products and providers on an apples-to-apples basis, the study reveals a complex story — the highest guaranteed income product varies significantly by client and when income begins,” said Tamiko Toland, head of annuity research at Cannex, in a statement.

“There are many factors that go into the selection of an annuity. Income generation is not the only one, but it is central to their value proposition and advisors need to rely on real analytics, not traditional perceptions or best guesses of how guarantees work to best serve their clients.”

GLB Riders on the Rise

Meanwhile, use of variable annuities with guaranteed living benefit riders has risen over the last several quarters after six consecutive quarters of decline — largely because the Labor Department’s fiduciary rule is dead, according to new research by LIMRA.

GLBs were introduced in the late 1990s and the riders became more popular in the early 2000s to ease consumers’ concerns about market volatility after the 2001-2002 downturn, LIMRA states.

While GLBs have been a driver of variable annuity sales, LIMRA notes, sales of VAs with GLBs dropped significantly from 2015 to 2017, while VA sales without a GLB have remained steady.

Todd Giesing, director of annuity research at LIMRA Secure Retirement Institute, told ThinkAdvisor on Wednesday that with Labor’s fiduciary rule being introduced in mid-2015, “it was apparent fairly quickly that variable annuities, particularly variable annuities with guaranteed living benefits, were going to be negatively impacted. The impact could clearly be seen as sales bottomed out in the third quarter of 2017, immediately preceding the initial implementation” of the rule.

The decline, he said, “was caused by tentativeness from distributors and advisors, and the uncertainty of operating in a post fiduciary environment.”

With the rule’s demise, “this tentativeness has faded,” and the “bounce-back in VA sales with a guaranteed living benefit can be attributed to pent up demand for guaranteed lifetime income solutions, combined with the fact some of the top annuity manufacturers are enhancing their guaranteed living benefit features, as interest rates have improved.”

The GLB election rates — which are based on the percentage of new premium that elected a GLB, when a GLB was available — were as follows over the past four quarters:

  • Q3 2017: 72%
  • Q4 2017: 73%
  • Q1 2018: 74%
  • Q2 2018: 75%

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