Why An Immediate Annuity Should Be Part Of Your Client%apos;s Portfolio

Another intriguing benefit of an immediate annuity is its ability to provide preferred tax treatment through the exclusion ratio. For example, as the client receives each payment, a portion is a return of basis and the remainder is gain, which is taxable at ordinary income rates. This helps to ease the client's income tax liability.

Additionally, because the client is not taxed on the investment earnings until withdrawn, the investment earnings grow faster. Lastly, an immediate annuity, when purchased prior to age 59 1/2 , can offer early withdrawal of assets without a tax penalty. Under IRC Section 72(q), annuity payments received no less frequently than annually under an income option for life or for the life expectancy of the annuitant are exempt from the 10% IRS tax penalty for withdrawal prior to age 59 1/2 .

Immediate annuities can provide clients with a sense of control that other investment vehicles cannot offer. For instance, clients can access funds through a full or partial withdrawal option. Many immediate annuity products include a withdrawal option with certain income options.

This feature provides access to the client's money should a financial emergency arise that cannot be met with the regularly scheduled payments. Withdrawals will reduce the client's periodic payments for the length of the term certain period.

Many immediate annuity products include an optional death benefit feature, which provides additional protection for family members. Death benefit options generally vary depending on the income option selected.

In addition, immediate variable annuities can provide clients with a variety of investment portfolios with potential to outpace inflation. Clients can also re-allocate investment options during payout.

Variations of annuity offerings

The fixed immediate annuity option is one variation. If the client elects a fixed immediate annuity, the dollar amount of the income payment is known. There is no fluctuation of income over time, regardless of market returns, interest rates or how the economy fares.

An unscheduled withdrawal or the death of an annuitant, however, can affect the amount of the client's income payments. Also, fixed income does not provide a hedge against inflation.

Alternatively, clients can opt for a hybrid, split-annuity strategy that lets them stay invested and secure a guaranteed income stream. You can help them manage market volatility risk through diversification by creating "buckets" of money for income.

For example, simply split the client's assets into two buckets. Allocate enough money to the first bucket to purchase a term certain immediate fixed annuity, which results in a regular stream of income. The remainder of the client's assets is placed in a single premium deferred variable annuity.

The deferred variable annuity can grow tax deferred, which may allow for the eventual restoration of the principal. When the income stream from the immediate annuity ends, the client can purchase another period certain immediate annuity and repeat the process.

This technique separates the income assets from the accumulation assets. Additionally, a dependable income stream is obtained based on the client's income needs.

Help clients prepare to live longer

Your clients must plan for the possibility of living longer. An immediate annuity can help meet their changing needs during retirement years and provide an income they cannot outlive. And by implementing a split annuity strategy, you may help ensure their retirement dreams are realized.

Catherine L. Venard, JD, CLU, is a senior advanced sales consultant for Nationwide Financial and a registered representative of Nationwide Investment Services Corporation. She can be reached at [email protected].

An immediate annuity can help meet their changing needs during retirement years and provide an income they cannot outlive.