Creating a Personal Pension Plan

How income annuities can fill the defined benefit void

By Bruce D. Harrington

Mr. Harrington is VP of Sales and Business Development at John Hancock Financial Network (JHFN), responsible for the development and implementation of sales and investment strategy and programs across all product lines of JHFN he can be reached at

According to Employee Benefits Research Institute’s (EBRI) most recent data only 15 percent of today’s workers have a defined benefit plan. Those without a company pension are beginning to realize they alone are on the hook to fund their retirement. Because of that, it’s not surprising we are beginning to hear the phrase “personal pension plan” in conjunction with retirement income planning.
One product that can help clients in this situation is an income annuity. It’s one of the only investment vehicles in the country that can contractually guarantee a stream of income clients can never outlive The guarantee, based on the financial strength and claims-paying ability of the issuing insurance company, can help provide “income for life”.
Income annuities are long term contracts between an individual and an insurance company that offer many potential advantages including, safety of principal, contractually guaranteed lifetime income, flexible income options, and inflation protection. Of course, these benefits come with additional costs, fees and expenses.
A good retirement income plan helps ensure money saved will last a lifetime, at the standard of living chosen by the client. Given the lifetime income guarantees now provided in annuity contracts, or offered as riders for an additional fee, one would think choosing an annuity would be logical. However, when offered the chance to own an annuity many people decline because there are some myths about annuities.

Here are some of the common myths:

Myth: If you don’t live as long as you expect, you lose your money.
Fact: Income annuities guarantee the client will be paid as long as they live – or – as long as they specify. Clients can choose a lifetime income annuity with beneficiary options that help ensure payments either continue to a beneficiary for a set period of time or have a “guaranteed return of premium” – meaning the payouts from the annuity will equal at least the amount they put in plus interest earned.

Myth: Guaranteed income annuities can’t keep up with inflation.
Fact: There are income annuities available that account for the annual increased cost-of-living adjustment, where the payments increase with the rate of inflation.

Myth: Guaranteed income annuities are only for older, conservative investors.
Fact: Income annuities can help strengthen and diversify anyone’s retirement portfolio, investing style or level of experience because they provide a stable component: guaranteed lifetime income. Moreover, it’s common for annuity contracts to increase income benefit values over time as a result of certain “step-up” provisions, or benefit guarantees. In most variable annuity contracts with guaranteed income benefit riders, the longer you wait to begin taking the guaranteed lifetime income benefit the richer that benefit becomes prior to its use. Most variable annuity contracts allow a minimum of 10 years worth of step-ups which are guaranteed regardless of underlying investment performance or market volatility. These factors can make annuity lifetime income products more appealing to pre-retirees who have the ability to take advantage of strong market performance or guaranteed step-ups in the first 10 contract years. Annuities are not right for everyone, but there are some advantages that can make them attractive for some clients prior to retirement.

Myth: Annuities are difficult to understand and own.
Fact: Annuities are complex in terms of grasping how riders work or structuring contracts to provide legacy values to beneficiaries. However, income annuities are actually designed to help make clients’ lives easier: Guaranteed income annuities replace the complex process of having to create your own income with the simplicity of a guaranteed retirement income stream.

Myth: I only need my money to last as long as my life expectancy.
Fact: Your clients cannot predict how long they will live. However, they can help protect against longevity risk by purchasing an annuity that provides a retirement income stream, no matter how long they live.

A good retirement income plan helps ensure money saved will last a lifetime, at the standard of living chosen by the client.

Myth: Annuities are far more expensive than alternative means of investing.
Fact: While it is true annuities are more costly than many alternative forms of investing, it is also true that the competitive pricing war of insurance carriers to attract investors to these now popular lifetime income guaranteed products has brought the average cost of mortality and expense charges down to 1.06 percent or 106 basis points. The increasing cost of the annuity will be determined by how extensive a client would like their guaranteed lifetime benefits to be. And as we have all heard so many times before, “price is only an issue in the absence of value.”

Before investing, clients should consider the investment objectives, risks, charges, and expenses of the annuity and its investment options. The bottom line is clients need help with retirement income planning. They need your help. The myths need to be dispelled. When financial reality finally kicks in for many, only the facts will help them achieve financial security for life. The financial representative needs to fairly represent annuities and help address the clients’ concerns. The idea of creating an income stream is an attractive option. Many times representatives do not use this type of product due to lack of knowledge or lack of a well rounded approach.

Sales Ideas:

  • n    Segment your book to find 401(k) clients at or near retirement. Determine if they are going to take a lump sum distribution from the plan at retirement. For these clients, protection against longevity risk in the decumulation phase is key and they need immediate help. In fact, if the option is available, some 401(k) plan participants can benefit from purchasing an annuity within their plan to transform their retirement savings into a guaranteed income stream that mirrors the payouts of a traditional pension plan.
  •  Help clients understand their ability to “annuitize their existing fixed deferred annuities”. If clients currently hold this type of annuity, there are some interesting options they could consider. For example, younger investors with a deferred annuity can convert their contract to lifetime income with a retirement income annuity. Older clients may want to convert and use the income stream to help pay for long-term care expenses. In both cases it’s money they are not currently using but can deliver positive lifetime benefits. You will need to fully explain and help your clients understand the risks of this type of exchange, including, but not limited to, surrender charges, possible loss of existing benefits, and a new surrender period.
  •  Talk to your clients or prospects about purchasing an annuity to help increase their confidence in their retirement strategy. It’s a proven fact people are more confident and secure about retirement when they have an annuity. A recent study done by MetLife found that across all net worth and total household income levels, guaranteed income streams (pensions, annuities, etc.) have a positive impact on retirement satisfaction.
  •  Look for a provider that sells annuities and has a good client retirement income solution in place. Ensure they have the right amount of product training for you in addition to education, tools, software and technology solutions for your clients to help deliver and monitor the best retirement income strategy for each and every one.


Income Annuities can work like a “personal pension” plan

Just like life insurance plays an important role in protecting people against dying early, an income annuity can protect against an increasingly frequent occurrence: living so long people outlive their savings.
Talk to your clients. Discuss whether an income annuity could be right for them. Chances are the majority of your clients with no company pension plan want to retire someday and would be interested in creating their own “personal pension” plan. Everyone can benefit from securing their retirement income. Not only could an annuity benefit your clients but it can also benefit the financial professional. According to a study by Fidelity in 2010, 94 percent of clients who were very satisfied with their retirement income plan would refer their financial professional to other potential clients!