554 / What is a private placement variable annuity (PPVA)?

A PPVA investment is an annuity that is available only to high net worth individuals who qualify as accredited investors (and, practically, qualified purchasers), meaning that they meet certain requirements as to net worth and investment sophistication. It is an annuity in that it is treated as such for tax purposes, but the similarities to the traditional retail annuities that most taxpayers associate with the term ends there—PPVA investments do not offer the types of income guarantee riders and protection against market risks that today’s retail annuities typically make available.

Instead, the draw of the PPVA investment is the investment flexibility and tax-deferred growth that these types of accounts offer. The taxpayer has the freedom to made additional deposits to the annuity and change his or her investment allocations based on a number of investment options—typically, these annuities will provide a choice of investments that includes non-traditional investment options, such as hedge fund and private equity investments that have the potential to generate substantial returns.

Taxes on the account growth are deferred until the taxpayer begins taking annuity payouts (a 10 percent penalty charge applies if distributions begin before the taxpayer reaches age 59½). In order to qualify for this favorable tax treatment, the PPVA investment must offer only investment options that are available solely to qualified insurance companies.

Further, the underlying asset allocations must meet certain investment diversification requirements—for example, no more than 55 percent of the individual’s assets may be allocated to any single investment and no more than 70 percent may be allocated to any two investments. The taxpayer has control over his or her investment allocations, but cannot have control over the investment choices that are offered within the PPVA investment—an independent investment manager must have discretion to choose the investments that will be made available to the taxpayer.