Saving Mom from too many annuity pitches

Rolling over variable annuities could play an important role in one's portfolio - but is that the best advice?

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: My 66-year-old retired mother has $210,000 in two variable annuities and $170,000 in stocks and mutual funds. She also owns her own home (which is worth $170,000) and hopes to sell another property for a $200,000 profit.

Despite this, she is struggling to make ends meet, living off some other savings plus Social Security. When I contacted her financial planner to complain about her situation, he suggested that she roll over $150,000 from one of her annuities (the one that no longer has surrender charges) into yet another annuity and then start collecting income from the annuities in four years.

In the meantime, he suggested she live off income from her stocks and bonds. I think my mother needs a new planner and some objective advice. What do you think? - Jennifer Schultz, Honolulu, Hawaii

Answer: Have you ever heard the expression "to a man with a hammer everything looks like a nail"? Well, some financial advisers who make a good part of their living selling annuities see variable annuities as the answer to virtually every client's financial needs.

Looking for tax-sheltered returns? A variable annuity will do the trick! Retirement investment? Can't beat a variable annuity! Looking for safety and guarantees? I've got just what you need - a variable annuity!

Hey, I'll be the first to admit that in certain situations a particular type of annuity (an immediate or payout annuity) can play an important role in one's portfolio, especially if you need guaranteed income beyond what Social Security and a company pension provide. (For more on the kind of annuity I'm talking about and what that role is, click here.)

But in my experience I've also found that annuities are frequently pushed on people who don't understand what they're getting and very well might be better off in other investments. (To see what I'm talking about on that score, "3 retirement deals you can do without."

And even in a situation where an annuity might be a plausible answer, it's hardly a given that a person will end up in the right type of annuity or get one at a decent price.

Is this because annuities often carry higher commissions than other investments? Well, I can't judge the motivations of every adviser recommending annuities. But you would have to be pretty nave to think that financial incentives don't play a significant role in cases where people end up in annuities who could do better elsewhere.

All of which is to say, yes, I think mom needs to see an adviser who will take a look at all of her assets, discuss her spending needs with her and come up with a suitable plan for getting income out of those assets.

Ideally, this should be an adviser with an open mind and a variety of different investment tools and strategies at his or her disposal. In other words, you don't want someone whose default position is to sell an annuity.

That said, it's possible that part of the solution in your mom's case might be to "annuitize" one of the annuities she already owns - that is, turn the account balance into a guaranteed lifetime income.

Be careful, though. Many variable annuities being sold today have a feature called a "guaranteed minimum withdrawal benefit" or "guaranteed lifetime withdrawal benefit" that looks something like the immediate or payout annuities I mentioned earlier, but is actually quite different.

One big difference is that variable annuities with guaranteed withdrawal benefits often carry total annual fees that can run 2.5% to 3% a year. I think that sort of fee burden makes them much less attractive than a traditional payout annuity.

Speaking of being careful, your antennae should also go up if an adviser recommends rolling over one variable annuity into a new one. Annuities typically have surrender fees or premature withdrawal penalties that can run 10% or more and last six to ten years.

If you move from one annuity to another, you may trigger one of those fees. Even if you wait until the surrender charge expires on your existing annuity, then you'll probably start a whole new set of surrender charges on the annuity you move into, thus locking you in for another six to 10 years.

It's possible that a rollover could still make sense in such a case if the annual fees on the new annuity were much, much lower than those on the old annuity. Alas, that's often not the case, and you can't help but wonder whether the adviser is recommending the switch into the new annuity because it results in a nice commission.

One final thing: before you and mom start talking to new advisers, you might want to take a look at a Buyers Guide To Annuities I wrote a few years back that explains how various types of annuities work. This way, if an adviser starts making a pitch for annuities, at least you'll be familiar enough with the territory to know what you're being pitched.


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