Many investors have been attracted to variable annuities, as a way to generate a fixed income for life. Unfortunately, annuities have become a major headache for countless investors.
As people are approaching retirement, many are concerned about how they will afford to live. They have watched the value of their investment portfolios drop dramatically and the current low interest rates have provided little hope. Variable annuities appeared to be the answer for near-retirees. Little did they know that there are serious problems that can result from these annuities.
The negative repercussions associated with variable annuities, which are contracts between the purchasers and the insurance companies, are numerous. Below is a brief list of some of the issues that have arisen as variable annuities have grown in popularity:
High fees: The fees associated with variable annuities are substantial. The U.S. Securities and Exchange Commission, SEC, states (in bold print) on its website that “these charges will reduce the value of your account and the return on your investment.” Some of these fees include a mortality and expense risk charge, administrative expenses, underlying fund costs and a surrender charge.
Not suitable for every investor: Variable annuities are not appropriate for everyone. Brokers often earn a higher commission when they sell variable annuities than other types of investments, which could make it tempting to push annuities on their clients. A broker who recommends an unsuitable investment could be liable for losses.
No additional tax benefits: Variable annuities are tax-deferred, meaning you don’t pay taxes until you withdraw your money. However, if the money invested in the variable annuity is through a 401(k) plan, IRA or other tax-advantaged retirement plan, there will not be any additional tax benefits.
High risk: Variable annuities are not without risk. The principal of the investment is not protected, despite what some brokers have led their clients to believe. Plus, investors become tied to the annuities due to the high surrender costs and possible tax consequences.