New Treasury Department rules published today aim to help to expand access to longevity annuities not only in 401(k)s but also in individual retirement accounts (IRAs). Supporters predict the regulations will ignite a slow but unmistakable chain reaction in the income annuity world.
The rules say that the value of longevity annuities can now be excluded from calculations of required minimum distributions (RMDs). The RMD is the government’s term for withdrawals that qualified retirement plan owners must start taking — and paying taxes on — at age 70.5.
For advisors who work in both marketplaces, this is news worth following. That’s because expanded access is expected to create demand for more advisory services and potentially for sales of longevity annuities.
Longevity annuities are deferred income annuities (DIAs) that start their income stream at the older ages, such as 80 or 85. The government calls the contracts approved for use in tax-qualified retirement plans “qualifying longevity annuity contracts” (QLACs).
The expected chain reaction goes something like this. Because the regulations are final, longevity annuity carriers will start creating QLAC products for this environment. Advisors will then present those products to plan sponsors and customers; plan sponsors will start offering the product as an income option in their employee retirement plans; and plan participants will start purchasing the long-term guaranteed income streams the QLACs create.
DIA expert Curtis V. Cloke said the advantage for consumers is “they will not have to pay the RMD on the QLAC premium (which can be no more than 25 percent of a person’s qualified account balance, up to a $125,000 maximum).
In addition, “when owners do start taking income from their QLAC, the payments will not be subject to the RMD — because the product has already solved for the RMD from that source of funds,” said the founder and chief executive officer of Thrive Income Distribution System, Burlington, Iowa.
Retirement experts view the longevity annuity itself as a positive for consumers in another way too: The future income stream will be substantially bigger than, say, an income stream from a comparable single premium income annuity purchased on the same day with the same amount but that starts payout in policy year one.
The regulations point to what the income in old age might look like. The example given is of a policy purchased with a $100,000 premium at age 70. At age 85, that policy could provide an income that, depending on assumptions used, pays anywhere from $26,000 to $42,000 a year, the regulations state.
Given that the longevity annuity regulations are now final, DIA carriers will probably start rolling out contracts that meet the QLAC requirements, Cloke predicted.
Most DIA carriers do sell policies on a qualified and non-qualified basis, he said, but he knows of only two that currently allow the income for qualified products to start beyond age 70.5. “There is opportunity here that carriers will understand,” he predicted, so advisors should expect to see more product activity sooner rather than later.
No variable or index annuities allowed
The coming product activity will be in contracts having a traditional fixed annuity chassis. That’s because the rules specifically prohibit use of variable annuities and indexed annuities. The 49-page regulation says that “a contract should be eligible for QLAC treatment only if the income under the contract is primarily derived from contractual guarantees.”
The regulators rule out variable annuities and indexed contracts because, they say, these products “provide a substantially unpredictable level of income to the employee” which is “inconsistent with the purpose of this regulation.”