Q: I recently attended an “elder planning” workshop. The presenter said my husband and I should sell our bank stock (worth $95,000) and buy an annuity that’s invested in the Standard & Poor 500 index. Does this sound like a good idea, or is it something to leave alone? We are in our 80s. The presenter is getting antsy and wants us to meet with him to take the annuity.
A: Of course he’s getting antsy. He’s imagining the fat commission he’ll be paid for talking you into what may well be an unsuitable investment.
Variable annuities, which combine mutual-fund-type investments with an insurance wrapper, often aren’t a good fit for elderly investors. You may be in too low a tax bracket to benefit much from the investment’s tax-deferral feature, and heavy surrender charges could take a big bite out of your savings if you needed to access your money in the next several years.
What’s more, selling your stock could set you up for a big fat tax bill, particularly if your shares have grown substantially in value over time.
A final problem with variable annuities: They aren’t given what’s known in tax circles as a “step up in basis.” Your stock would be revalued on your death so that your heirs wouldn’t owe any income or capital gains taxes if they sold the shares immediately. Withdrawals from variable annuities, by contrast, incur income tax.
Unfortunately, these downsides may not have been explained to you. The salespeople who promote variable annuities sometimes neglect to adequately illustrate their disadvantages, which is one of the reasons regulators have gone after insurance companies and agents in recent years for selling unsuitable variable annuities to elderly investors.
Bank of America, for example, just announced a settlement with Massachusetts state regulators that would allow customers who were at least 78 when they bought their annuities in 2003 and 2004 to liquidate them without having to pay surrender charges.
Now, it’s entirely possible that you might be better off in an index fund or even a certificate of deposit than having so much money wrapped up in a single stock. But you’ll want to discuss that issue with someone more objective than an annuity salesperson, such as a fee-only financial planner.