How flexible annuities fit today’s retirement portfolios

Annuities are not created equal. Although many of them are primarily designed for retirement, some offer flexibility for clients with other savings goals.

Gainbridge Flex, for example, is intended for non-retirement goals. Other flexible annuities, such as the Navy Mutual Flexible Premium Retirement Annuity and the FCSU Flexible Premium Annuity, also allow small, ongoing deposits.

However, unlike Gainbridge Flex, they're tax-deferred and mainly built for retirement savings. As insurers explore ways to serve clients with financial goals beyond retirement, more options may emerge in the future.

“Traditionally, annuities have mostly been sold to people with a large lump sum and a retirement date. Gainbridge Flex, however, is for savers who could be decades away from retirement but still want a fixed rate on money they can’t afford to lose right now,” said Derek Towriss, president at Gainbridge.

Flexible annuities are essentially goal-matching tools rather than retirement savings products.

“They work best when there’s a specific goal with a clear timeline, such as a down payment in three years or tuition in five, and the client wants a guaranteed rate,” said Jason Caudill, founder and president of My Annuity Store.

As an advisor, it’s important to understand and explain the value of flexible annuities, especially for clients who want predictable returns while saving for specific financial goals.

How flexible annuities compare to other products

In some cases, flexible annuities are a good alternative to other products, such as certificates of deposit (CDs), high-yield savings accounts (HYSAs), and traditional annuities.

When determining what options make the most sense for a client, consider rates, liquidity, guarantee backing, and what will happen if their plans change.

“Flexible annuities usually out-yield CDs, and unlike a high-yield savings account, the rate is locked,” Caudill said.

They can allow clients to keep adding money into different guaranteed terms with different rates. However, as with all financial products, flexible annuities come with trade-offs.

CDs and HYSAs are insured by the Federal Deposit Insurance Corporation (FDIC). Annuities, on the other hand, are backed by the insurer’s claims-paying ability, so carrier strength should be part of the rate conversation, not a footnote.

“Always check the AM Best rating and outlook before assuming a flexible annuity as safe as a bank product,” Caudill explained.

Don’t forget to read past the headline liquidity claim.

“Beyond the typical 10% penalty-free withdrawal allowance available with some tax-deferred annuities, surrender charges and a market value adjustment (MVA) can make accessing money more costly than paying a CD’s early withdrawal penalty,” added Caudill.

Clearing up common misconceptions

Most clients believe that annuities are only for retirees with a large sum of money to invest.

The reality is some products are more accessible than clients may realize, with minimum investments as low as $100 and terms as short as one year.

Many individuals also assume every annuity grows tax-deferred. However, this isn’t always the case.

For example, even though Gainbridge Flex is classified as an annuity under state insurance law, it does not meet the federal requirements for tax deferral. Its interest is generally taxable each year.

“Since non-tax-deferred annuities aren’t subject to the 10% IRS early-withdrawal penalty that can apply to traditional annuities before age fifty-nine and a half, they can compete with CDs for younger savers’ money,” Caudill said.

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Anna Baluch is a finance reporter and writer with more than a decade of experience. Contact her at anna.baluch@innfeedback.com