Annuity sales presentations stress tax-deferral, with little information about such disadvantages to older investors as the following:
- With fixed annuities (deferred or immediate), inflation can erode the value of the locked-in fixed payments.
- Annuities are often sold without sufficient analysis or attention paid to structuring these contracts properly. By switching annuities, the owner may incur withdrawal charges from the current annuity, while being penalized for premature withdrawal charges. This includes transfers to a beneficiary because of death of the contract owners.
- Variable annuities have an average annual 1.3 percent charge against the assets, plus a $27 annual administration charge for "mortality and expense charges." This is in addition to the underlying investment fund charges. According to the article, "Are Variable Annuities Right for Your Client?" in the January 2003 issue of the Journal of Financial Planning, this creates a five- to 15-year break-even period for those highly taxed individuals, depending upon the amount of M & E charged and the individual's tax rate.
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