Fiduciary Annuity Review: Does This Annuity Make Sense?

The answer is not always obvious. The contract tells you what the annuity does. It does not tell you whether that fits your plan. That depends on your income, taxes, other investments and estate plan.

This is a paid planning engagement. We explain what the contract does, what it costs and how it fits with the rest of your plan. Then you decide what to do. Sometimes the right answer is to keep the annuity you have.

If You Already Own an Annuity

Maybe you bought the annuity years ago and have not looked closely at it since. Maybe it came from an old 401(k) rollover. Maybe you inherited the contract from a parent, and nobody has been able to explain exactly what you own.

The annual statement may show several values. The amount you could take out today may be different. There may also be an income benefit, death benefit or other value that works under its own set of rules.

We read the contract and answer the basic questions first. What is it worth if you keep it? What would you receive if you left today? What are you paying each year? What benefits have you already paid for? What would you give up by making a change?

Then we put the contract into your retirement plan.

If the annuity provides income, when would you need that income? How does it fit with Social Security and pensions? What happens when required distributions begin? Could a withdrawal or surrender affect your taxes or Medicare premiums?

We also look at the rest of the portfolio. Money tied up in an annuity may change how much you need to keep available elsewhere. An income guarantee may affect how the other accounts are invested. A contract that looks expensive by itself may provide a benefit the rest of the plan does not provide.

The estate plan belongs in the same analysis. We look at who would inherit the annuity, what they would receive and how the contract would be taxed to them.

Sometimes the findings support keeping the contract. Other times they may support waiting until the surrender period ends, changing how you use the contract, exchanging it or surrendering it. We show you the choices and what each one would change in the rest of your plan.

If Someone Is Offering You an Annuity

The conversation may start with a maturing CD at the bank. A representative suggests moving the money into an annuity. Or you may be rolling over an IRA or old 401(k) and have been shown an indexed annuity as one of the choices.

You are usually given an illustration and information about the contract. The illustration shows projected values based on assumptions. The contract tells you what is guaranteed.

We read both.

We look at what the annuity is supposed to do for you. Is it meant to provide lifetime income? Protect part of the account from market losses? Provide a death benefit? Keep money growing tax deferred?

Then we test that job against the rest of your plan.

If the goal is retirement income, we look at the income you already expect from Social Security and pensions and when you will need more. If the money is coming from an IRA or old 401(k), we look at required distributions and taxes. We look at how much money would remain available outside the annuity and whether the rest of the portfolio can cover spending that cannot wait.

We also look beyond your lifetime. Who would inherit the contract? What would they receive? How would it be taxed to them? Those answers can change how the annuity fits with the rest of the estate plan.

Some annuities fit. A contract that turns part of your savings into guaranteed lifetime income can make sense when Social Security and a pension do not cover your core expenses. The question is whether the specific contract you are considering does the job you need it to do on terms you understand.

What You Are Paying Us to Do

You may already have received an explanation of the annuity from the person who sold it or is recommending it. Our job is different.

We are being paid to analyze the decision, not to place a contract.

That means reading past the illustration and into the contract. We identify the surrender terms, annual charges, rider costs, guarantees and the rules that determine what you can receive and when.

For an indexed annuity, that includes how interest is credited through caps, participation rates and spreads. For an annuity with an income or death benefit rider, we look at what the rider actually guarantees and what has to happen for you to receive that benefit.

But reading the contract is only part of the work. The larger question is what the annuity changes in your financial plan.

We look at your income needs and timing, Social Security, pensions, required distributions, taxes, Medicare premiums, the rest of your portfolio, your need for available cash and your estate plan. The same contract can fit one plan and be a poor fit for another because those facts are different.

The Annuity Decision Analysis is paid by fee. As a fiduciary, and under the CFA Institute Code of Ethics, we always put your interests first. Implementation is a separate step, and only if you ask for it. Any conflicts of interest are disclosed where necessary.

You receive our analysis and judgment. There is no next step you have to take with Holland Capital.

How the Engagement Works

An Annuity Decision Analysis is a planning engagement with a defined scope.

We start with a conversation about the contract you own or the one you are considering. We also need enough information about the rest of your finances to understand what job the annuity is supposed to do.

Then we define the scope and the fee in writing before you decide whether to go ahead.

For the contract itself, we will usually need the contract or proposal, the most recent annual statement, the surrender schedule and any illustration you were given. If you would like to see the questions first, our article on how to get a fiduciary second opinion on an annuity walks through them. If the question turns out to be bigger than the annuity, broader retirement planning is scoped and quoted separately.

You receive written findings and a conversation about them. We explain what the contract does, what it costs, what you would give up by changing it and how each reasonable choice affects the rest of your plan.

What you do with the findings is your decision. You can act on them yourself, with anyone you choose, or ask us to help with implementation, which is separate from the analysis.

M. Chad Holland, CFA, CFP® works directly with clients and does the analysis personally.

Frequently Asked Questions