Dear nronronronro,
Thanks for your question. Good to see you in our forum again, and
thanks for continuing to bring such interesting questions to our
attention.
First, let me request that if any of the following is unclear or if
you require any further research – please don’t hesitate to ask me for
a clarification.
You requested ten pros and ten cons of annuities…here we go then…
Pros of Annuities
---------------------
1) Viable alternative to now rare employer-sponsored pensions
2) Income stream - guarantee life-long steady income for individuals
who fear they may outlive their resources
3) Favored tax status - function as long-term savings plan but allow
investment to grow *tax free*
4) Offer a guarantee against investment losses
5) Excellent investment vehicle for someone maxed out on qualifies
tax-free or tax-deferred investments – method to defer taxes on
additional investments
6) No limit on amount that can be contributed to an annuity
7) Investors can switch among annuity accounts without adverse tax
effects allowing for some additional degrees of flexibility in
financial planning
8) Risk of longevity transferred to an insurer who is well-equipped to
bear it
9) No income level restrictions – anyone can contribute
10) Premium paid for outliving one’s life expectancy
Cons of Annuities
---------------------
1) First and foremost an insurance product rather than a saving
vehicle
2) Relatively large initial outlay – or else requires investor to
commit substantial payments over a long period of time
3) Most annuities non-qualified for favored-tax status when formed –
i.e. investment must be made with after-tax dollars
4) Funds withdrawn early (typically before age 59.5) subject to 10%
tax penalty
5) Earnings withdrawn from an annuity taxed as ordinary income rather
than as capital gains
6) Annuities incur fees to the insurer and the administrator at the
outset
7) Additional fees – upfront sales charges and back-end surrender
charges
8) Expense ratios paid to annuity sub-account managers higher than
ratios paid to managers of same mutual funds (outside of the annuity);
main point is that all of these fees (items 6,7,8) could compound over
time…therefore tax benefits may not be as compelling as they would
otherwise appear to be…
9) Annuity “sales-speak” often difficult to comprehend – difficult for
customers to distinguish among good and bad annuities
10) Investor may be paying for additional life insurance he/she does
not need and is paying for elsewhere
11) Need long stretch of time and a considerable investment to make
it work – e.g. someone in the 28% tax bracket with a variable annuity
at an average expense ratio needs 10-15 years before the annuity will
become a competitive investment vehicle
I hope this response adequately addresses your request. Please let me
know if you are in need of additional information concerning this
query.
Thanks,
ragingacademic-ga
References:
“The Pros and Cons of Annuities,” by Pamela J. Black
http://registeredrep.com/ar/finance_pros_cons_annuities/
“The Pros and Cons of Annuities,” by Dorothy Rosen
http://www.bankrate.com/brm/news/dollardiva/20000608b.asp
Additional Links:
“Are Annuities for you?” – from CNN/Money
http://money.cnn.com/1999/10/15/mutualfunds/funds_annuity/
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