A Tax-deferred Savings Account -- Sort Of
BY John Case
Take, say, $20,000 that you want to set aside for something down the road -- retirement, maybe, or the first few years of college tuition. You don't want the principal to fluctuate, you want high rates, and wouldn't it be nice if you could defer taxes on all that compound interest you will be earning?
Welcome to -- hold your breath -- the single-premium deferred annuity.
Annuity. Yawn. "Annuities conjure up the image of high-button shoes," wrote Deborah Rankin in The New York Times not long ago, and in years past they were indeed the little old ladies of the investment business. Some of them were simply life insurance policies in reverse, offering you a guaranteed monthly income until death in return for a single lump-sum payment. Others let you buy into an investment portfolio. And all of them, typically, charged sizable sales fees and paid low average rates of return.
A good single-premium deferred annuity, however, resembles the traditional variety about as much as a Corvette resembles a Packard sedan. It pays competitive rates (10% to 10 1/2% as of early summer), usually adjusted up or down every year with the market. It allows complete tax deferral on earnings until the money is withdrawn, and it carries no sales charge. It also lets you get at your money without penalty after 10 years, or after you turn 59 1/2. In 10 years, a $20,000 annuity paying an average 9% would metamorphose into upwards of $47,000, with no taxes due in the interim.
"It's an outstanding investment vehicle for anyone," says Robert Filderman, national marketing director for E. F. Hutton Insurance Group. Although he sells annuities for a living, Filderman has a point.
Even if the idea is appealing, you stiIl need to separate the good deals from the mediocre and the downright risky. Here are some guidelines:
* Know the insurance company that is offering the annuity. Two big carriers in recent years were National Investors Life Insurance Co. and University Insurance Co. of America. Both were owned by Baldwin-United Corp., a company whose financial difficulties cast doubt on the safety of their annuities. Any hint of trouble with the insurance company, points out Don Korn, editor of Personal Wealth Digest, could trigger a "run" on annuity policies something like an old-fashioned run on a bank. If you are in doubt about a company, check its ratings with an independent analyst like A. M. Best Co.
* Don't go for an annuity with a front-end sales charge (there are still a few left, for the suckers who are born every minute). And check out what the insurance industry delicately refers to as "rear-end" charges. These are often called surrender fees, and they tell you how much you will have to pay for withdrawing your money prematurely. For the annuities of Equitable Life Assurance Society of the United States, for instance, you are assessed a fee that declines from 6% to zero over a seven-year period.
* Look both at the current rate on the annuity and how it will get adjusted in the future. Companies frequently set a limit on how far the rate can move each year, and some offer a "bail-out rate." If the current rate falls below that level, you can withdraw your money at any time without paying a surrender fee.
You can buy annuities directly from a life insurance company, through a broker like E. F. Hutton, or through at least one mutual fund group, Fidelity.