Planning for Income Needs with Annuities

Earning income once your paychecks stop—that is, after your retirement—requires preparing for what’s to come and having a sense of confidence about what you are going to live on.

In this post-pension era, that means devising a plan of your own—one built on the retirement you envision and that also takes into account rising medical costs, longer life spans and inflation. It also requires a portfolio that smartly generates income as you need it. Such a portfolio may call for annuities, which guarantee income over specified periods.

Income beyond the Paycheck


Annuities are insurance contracts that guarantee1 you an income stream that can last as long as you live—and, typically, provide a death benefit for your named beneficiaries. Annuities allow you to save and grow your money on a tax-deferred basis, and then receive regular income payments later, after you retire. Some annuity contracts offer a fixed rate of interest, while others make it possible for you to invest in a wide range of fixed and variable subaccounts with different objectives and investment strategies.2 Many annuities also offer a variety of living and death benefit options, usually for additional fees.

It’s important to understand that there’s no substitute for a comprehensive retirement savings program that takes full advantage of other tax-favored vehicles, such as 401(k) accounts and IRAs. Additionally, an annuity can be a valuable supplement to such plans—particularly because there are no IRS limits on your ability to use after-tax dollars to fund annuity contracts.3 However, they may include unfamiliar features and carry additional expenses, relative to non-insurance investments, such as mutual funds.

What Is an Annuity?

An annuity is a contract with an insurance company that, in exchange for a purchase payment and fees, agrees to pay you income for a specified period of time or for the rest of your life. Starting at retirement, or any other date you choose, you receive regular income payments based on the value of the annuity. The issuing insurance company guarantees your payments. This provides a type of protection for your retirement income.

Annuities allow you to invest money on a tax-deferred basis. On nonqualified assets, this means you don’t pay current taxes on any gains until they are withdrawn, so your money can compound and grow faster than in a taxable account. Also, by the time you are ready to begin withdrawing from your annuity, you may be in a lower tax bracket.

What Type of Annuity Is Right for Me?

That depends on your specific financial situation, marital status, projected income needs, etc. One key issue is timing. In general, annuities fall into two categories: immediate or deferred. As the name implies, immediate annuities begin providing income soon after they are purchased, usually within a year. The insurance company guarantees payments for a specified period of time or for life. However, only the portion of your income payment that represents interest is subject to taxation.

Deferred annuities, on the other hand, allow your contributions to grow over time on a tax-deferred basis, and then pay out benefits later—for example, after you have retired. While deferred annuities are typically designed to be long-term investments, the contracts allow you to access at least a portion of your money annually without a charge. However, withdrawals of any gains are taxed as regular income and, if taken before age 59½, a 10% federal tax penalty also may apply.

Other Benefits of Annuities

•      Unlimited Contributions: Unlike other tax-sheltered plans, such as 401(k)s and IRAs, there are no IRS limits on tax-deferred contributions to nonqualified annuities.4 While you should fully fund your retirement plan(s) first, an annuity may be an appropriate investment for other assets.

•      Longer Tax-Deferral: While many retirement plans require distributions to begin after reaching age 70½, nonqualified annuities allow you to defer withdrawals until age 90 (or longer in some cases).

•      Tax-Free Transfers: Variable annuities allow you to move money between investment options without incurring current income-tax liabilities. As your goals change, you can invest as aggressively or conservatively as you want.5

•      May Avoid Probate: By naming a beneficiary or beneficiaries to your annuity contract, you can ensure that any death benefits will be transferred directly to them, bypassing probate and increasing privacy. (Probated estates allow public access to records of the probated assets, for both values and beneficiaries.)

•      Tax-Free Exchanges: You can exchange one annuity contract for another or a life insurance contract for an annuity without incurring current income-tax liabilities. This may be appropriate if your contract is older and does not provide access to the full range of living and death benefit options now available, or if the performance of your variable annuity sub-account options has been subpar. While this type of exchange is currently considered an income tax-free event, there may be surrender charges.

Counting the Costs

Because of their unique benefits, annuities typically have costs not associated with other investments. These charges cover the expense of contract administration, management and the costs associated with death benefit and income options. Your Financial Advisor can work with you to help get the guarantees and benefits you are looking for while keeping costs in mind.

Whether your retirement is years or months away, or even here today, you need a strategy that will provide a dependable income stream. As part of a comprehensive retirement plan, annuities have much to offer. Your Financial Advisor can help you determine if an annuity is right for you.

1 Guarantees are based on the claims paying ability of the issuing insurance company.

2   The variable subaccounts may include actively managed portfolios, exchange-traded funds, indexed or indexed-linked portfolios, alternative investments and other quantitative-driven strategies. The variable subaccounts typically invest in various asset classes that may include stocks, bonds, derivatives, commodities, money market instruments or other investments.

3  The issuing insurance company may restrict premiums on the contract.

4  Annuities can be held in tax-qualified retirement plans such as IRA accounts. These are called qualified annuities. Annuities purchased with after-tax dollars and not held in a qualified plan are called non-qualified annuities. Qualified annuities provide investors with the same insurance benefits offered by non-qualified annuities. They do not, however, provide any additional tax benefits. Tax deferral is provided by the qualified plan itself.

5 There may be fees associated with these transfers, generally assessed when the requested number of transfers exceeds the allowable number of transfers as defined in the contract. Transfers are subject to limitations and restrictions imposed by the insurance company and are detailed in the prospectus.

Annuities are offered in conjunction with Morgan Stanley Smith Barney LLC‘s licensed insurance agency affiliates.

Annuities are long-term investments designed for retirement purposes and are subject to investment risk, including the possible loss of principal. Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty.

Early withdrawals will reduce the death benefit and cash surrender value. Additionally, exchanging annuities may result in surrender charges and a new surrender charge period. New surrender charges may be imposed with a new contract; and the new contract may be subject to additional insurance and investment-related fees as well as increased risk.

All guarantees are based on the claims-paying ability of the issuing insurance company.

Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the variable annuity contract and the underlying investments, which should be considered carefully before investing. Prospectuses for both the variable annuity contract and the underlying investments are available from your Financial Advisor. Please read the prospectus carefully before you invest.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. Clients should consult their personal tax advisor for tax related matters and their attorney for legal matters.

© 2018 Morgan Stanley Smith Barney LLC. Member SIPC.

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