Security Benefit today applauded the findings of new research published by David Blanchett, Managing Director, Head of Retirement Research, PGIM DC Solutions. The paper highlights the potentially significant income benefits derived from using a tax exclusion ratio, in non-qualified products, available as part of its ClearLine Annuity Rising Income Rider.
“Blanchett’s work helps reinforce the value ClearLine represents for clients of RIAs and fee-only advisors,” said Doug Wolff, President of Security Benefit Life. “Many of ClearLine’s features, including the exclusion ratio, were the direct result of our partnership with DPL Financial Partners, and the unprecedented access we had to direct input from advisors themselves.”
“We try to design products that address RIA needs and concerns,” added DPL Founder and CEO David Lau. “The tax efficiency of annuity payouts is one of them. David’s paper is extremely helpful for advisors looking to quantify the benefit of the exclusion ratio in ClearLine.”
“How to Increase After-Tax Income for GLWB Annuities,” published by AdvisorPerspectives.com, notes that the tax benefits of annuities during distribution can be complicated and differ across products, but some stand out.
“Strategies such as fixed index annuities that are able to generate more after-tax income are often described as generating ‘tax alpha’ for investors,” said Lau. “This study explores the potential impact of converting income from a GLWB using tax exclusion ratio taxation, versus traditional methods—turns out the benefits of the exclusion method can be significant.”
The paper explains that there are generally two ways distributions from annuity accounts are taxed: either all gains are taxed first, which can lower income in the early years of retirement (possibly longer) and thus overall, or by using an exclusion ratio where gains can be amortized (spread out) over the life expectancy of the annuitant. The amount of gains taxed are the same in both cases, but when gains are taxed is the key difference.
“The potential benefit of tax exclusion ratio taxation can be even higher for individuals with higher tax rates and higher expected returns,” noted Lau.
“Clients in non-qualified accounts can not only benefit over time in the accumulation phase from tax-deferred growth, but also during decumulation by essentially ‘deferring’ taxes even longer when leveraging the exclusion ratio,” said Wolff. “Fixed index annuities (FIAs) like ClearLine are a smart option for advisors when considering both their strategic and tactical approaches to retirement planning.”
ClearLine offers even more potential advantages.
“ClearLine certainly delivers a powerful combination of accumulation potential, tax-deferral and long-term income benefits,” said Mike Reidy, Head of RIA Distribution for Security Benefit. “And, in addition to the tax exclusion ratio, our private letter ruling from the IRS allows financial professionals to deduct fees from ClearLine’s cash value during the accumulation phase without tax consequences for client portfolios.”
“In addition to our ClearLine FIA, Security Benefit has made a concerted effort to provide financial professionals with tax-efficient withdrawal strategies in variable annuities too.” Helping to mitigate the tax bite during payout is one way to address the objection that annuities are taxed at ordinary income rates during withdrawals.