Planning For Longevity

Guaranteed Appeal

Advising annuities in a fluctuating marketplace

by Herb Braley, Jr.

Mr. Braley has qualified for MDRT for 18 years with 17 years at Court of the Table or Top of the Table. Braley Financial Advisors is a full service financial advisory firm, handling insurance and investment matters for customers. Herb’s mission is to help people do what they want with their money, and get it back to them when they need it the most.

A growing concern among working individuals is whether or not they are saving enough money for retirement. Luckily, various financial products exist to mitigate the longevity risk and provide guaranteed solutions. One of the strongest options is an annuity because they are the only investments that are inherently tax-deferred and can be considered guaranteed income. The product is an agreement between your client and the insurance company in which they pay a sum of money, either all at once or in a series of payments, to provide regular disbursements for the rest of their life. They can also be combined with other products, such as cash value life insurance, to provide a custom solution based on your clients’ needs. While annuities have long been an appealing product, the current marketplace has positioned segregated fund contracts as a better fit.

The Ideal Marketplace for Annuities

When annuities were relatively new to the marketplace with high interest rates, they were lucrative, appealing solutions for clients. Whether clients invested in a term-certain annuity or a life annuity with some guarantees, the number one benefit has always been the guaranteed income, a universal need. In recent years, interest rates have been at an all-time low in Canada, which makes the market less conducive for annuity products. As the interest rate environment changes, we’ve seen investments like segregated fund contracts increase in use because they keep clients in the market with access to capital.

We can expect the annuity market to become more prominent as interest rates slowly begin to rise. When they reach around 5 to 8 percent, the annuity market will take off again. Companies and people who sold or positioned annuities before, will start to again, and those who never sold them in the first place may break into the market. An annuity in a market with a high interest rate is just about one of, if not the best option out there for clients. Although it might not be the best marketplace for annuities right now, there will certainly be more of a thriving marketplace for them in the future.

Strategic Annuity Options

Advisors who utilize annuities in the current market often do so with creative strategies in mind for their clients’ specific situations, such as those leaving an employer or in search of a combined policy. For instance, I continue to use annuities to help clients commute money from pensions. Those who leave an employer with a defined-benefit pension can either take its value at lump sum or leave it with their employer. Both options have associated risks. Commuting the pension can have large tax implications and leaves clients’ assets vulnerable to market risk. If they leave the pension with their former employer, clients risk losing their payout if the company can’t meet their commitments. Depending on the options their pension can afford, commuting the money to an annuity can be of real benefit to the investor who does not want to lose the pension’s benefit of guaranteed income for life without investment risk.1

The tax-smart concept of back-to-back annuities is another unique strategy for the current marketplace. Back-to-back annuities, also called insured annuities, are sold primarily to high-net-worth investors over the age of 70 who are in need of estate planning or tax effective income once they are retired.2 To offset the capital that’s been given up by the investor for the annuity, you can offer to sell them an insurance policy or a joint last-to-die policy. First, the customer will receive a very tax-effective income from the annuity given that at least a certain portion of the money coming out of it is a return of capital. They then use some of the money from the annuity to pay the premium on an insurance policy that can replace all that capital on their death, tax-free. These policies allow the investor’s beneficiaries to receive payments even after the investor has died. This ensures that if an investor passes earlier than expected, the remaining money will still benefit their family and not go to waste.

Alternatives for Client-Specific Needs

The tax-smart concept of back-to-back annuities is another unique strategy for the current marketplace. Back-to-back annuities, also called insured annuities, are sold primarily to high-net-worth investors over the age of 70 who are in need of estate planning or tax effective income once they are retired

While I used to work with clients nearing retirement who may be more receptive to annuities, my client base changed and I now find myself recommending alternative products. If your clients do not fall into the needs outlined above, especially in the low interest rate environment, consider alternatives to annuities such as segregated fund contracts, which come with various benefits and guarantees.

Segregated funds have guarantees and estate advantages that most other investments do not have. They still keep the investor in the market with access to capital, as opposed to annuities where the investor gives up the capital and has to factor in low interest rates to determine the payout. Death benefits, market value and income guarantees from segregated funds protect deposits, growth and redemptions for the client before and after retirement. Customers are also able to name beneficiaries and have the proceeds transfer on death, with no cost or delay. The proceeds pass around one’s estate, instead of through it because insurance industry investment products fall under the Insurance Charter in Canada and are not treated like all other investments that fall under the Banking Charter.

Changing Landscape for Annuities

The landscape of annuities is also affected by the state of the insurers. For instance, the market experienced a significant shift when Manulife bought John Hancock out of the United States in 2004. Through the cross-border merger, Manulife gained access to a new stable of products including the variable annuity, causing sales to increase in Canada. However, fixed annuity options have become limited due to many insurers ceasing external sales.3 The low interest rates and volatility make it difficult to guarantee income. Fewer insurers signal less citizens will be able to secure guaranteed income at a time in which they need it most.

No matter how much an advisor thinks they know the market, they can’t predict its direction with complete accuracy since predictions are only based on past market performance. Unforeseen events with unexpectedly large effects on the market can happen, seemingly out of nowhere. With social media, investors have direct access to prominent national leaders and thought leaders from the companies in which they invest. As a result, something as simple as a Tweet can cause a boom or decrease in the market, depending on perceived changes in market value. Events with global impact such as 9/11 and the 2008 financial crisis can have more lasting impacts on the market, vastly affecting individuals in or approaching retirement at this time. Despite an unpredictable market, annuities or term deposits are the only options we have to guarantee clients will not run out of money. Plans that have a base guarantee, much like a pension, can reassure clients and provide income even if the market value drops to zero.

Now, your product offerings and expertise can ensure customers get the most out of their savings plans for a successful financial future. ◊




1. The Globe and Mail, Worried about your pension? Why a ‘copycat’ annuity might be right for you
2. Advisor’s Edge, Retirement income: Back-to-back annuities
3. Investment Executive, Quitting annuities