According to a study conducted by the Society of Actuaries, nearly two-thirds of retirees are worried about running out of money in retirement, but those who have immediate annuities have more confidence in their ability to cover basic living expenses. In fact, the study found that immediate annuities can provide a higher standard of living for retirees than traditional retirement savings strategies. (Source: Society of Actuaries, 'Retirement Income Adequacy at Large Companies: The Real Deal 2018 Study,' October 2018)
What Is an Immediate Annuity?
While there are numerous variations of immediate annuities, the basic terms are straightforward: you give a single lump sum of money to an annuity issuer (an insurance company) in exchange for a fixed income for a fixed period of time, for the remainder of your life, or for the joint lives of you and another individual. Immediate annuities are attractive to investors who desire a lifetime income guarantee.
Caution: Guarantees are contingent on the issuer's ability to pay claims.
Who Should Consider an Immediate Annuity?
A direct annuity can be a useful financial instrument. University of California employees may wish to discuss immediate annuities with a financial advisor if:
- You desire a revenue stream that you cannot outlive.
- You have a sum of money that you would like to convert into a regular source of income, but you do not wish to leave it to your successors. If you wish to leave a portion of your wealth as a legacy, an immediate annuity might not be the best option. However, the guaranteed income provided by an immediate annuity may replace the income provided by other assets, permitting those other assets to be bequeathed.
- You are uneasy with investments that carry a substantial risk of loss. According to financial experts, the majority of retirees can make their savings last until death without purchasing an imminent annuity if they plan properly. However, you may need to invest at least a portion of your savings in equity investments to accomplish this. If the risk of loss associated with investing in stocks is unappealing, an immediate annuity allows you to delegate that risk to an insurance company. While the income guaranteed by an instantaneous annuity is contingent on the issuer's claims-paying ability, immediate annuity payments are not subject to stock market risk.
- You anticipate living a lengthy life. If you are in good health and your family has a history of longevity, an immediate annuity may be the best option for you.
Strengths
Some advantages of immediate annuities include:
- Safety and protection. An immediate annuity can provide a lifetime income stream that is guaranteed. If lifetime income is required for a fixed period of time, an immediate annuity can provide guaranteed lifetime income payments.
- Simplicity. You are not responsible for managing or worrying about your investments, monitoring markets, or reporting interest or dividends.
- Fiscal management. Due to the exclusion ratio used to determine the portion of your income payments that you consider as ordinary income, a portion of the payments you receive are treated as a return on investment and not as ordinary income.
Caution: Guarantees are contingent on the issuer's ability to pay claims.
Tradeoffs
- It is possible that you will not live long enough to obtain a full return on your investment if you select the life-only payout option. If payments cease upon your demise, your family may suffer from a lack of income.
- You surrender control of the funds used to pay the premium for an immediate annuity. If you require a significant sum due to an illness or other emergency, you may not have access to it. Consider the available immediate annuity options carefully.
Tip: Some annuity issuers permit you to accelerate payments due to ill health, or you may be able to receive a lump sum (commuted payment) during specific time periods and for specified amounts. Depending on the issuer, these features may be accessible for an additional fee.
- Your immediate annuity payments may not maintain pace with your expenditure requirements or inflation. Since immediate annuities are not designed to provide the highest possible investment return, you may find that alternative investments offer potentially higher yields for the same level of risk.
Tip: University of California employees should weigh the potential risk of loss on the alternative investment due to adverse market conditions against the guaranteed income from the immediate annuity, which is paid regardless of market conditions.
Caution : Guarantees are contingent on the issuer's ability to pay claims.
How Does an Immediate Annuity Work?
As its name suggests, an immediate annuity begins paying you an income stream immediately. The quantity of income you receive depends on a variety of variables. Initially, actuarial formulae are utilized to calculate immediate annuity payments. These tables accommodate for the annuitant's expected lifespan. The timing and quantity of payments are dependent on the annuitant's life. Not always, but typically, the annuity proprietor is also the annuitant. In the case of joint and survivor annuity options, an actuarial formula incorporating the annuitant's age and the age of the designated survivor is used to determine the amount of periodic payments.
Second, the payments are based on the interest rate that the issuer of the annuity pays on the premium. The annuity payment will be greater the higher the interest rate.
Thirdly, immediate annuity payments are based on the distribution option you select. In general, longer payout periods, such as payments for life, result in lower payouts than shorter, fixed payout periods, such as five or ten years.
Featured Video
Articles you may find interesting:
- Corporate Employees: 8 Factors When Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Medicare Open Enrollment for Corporate Employees: Cost Changes in 2024!
- Stages of Retirement for Corporate Employees
- 7 Things to Consider Before Leaving Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
- Corporate Employees: Do NOT Believe These 6 Retirement Myths!
- 401K, Social Security, Pension – How to Maximize Your Options
- Have You Looked at Your 401(k) Plan Recently?
- 11 Questions You Should Ask Yourself When Planning for Retirement
- Worst Month of Layoffs In Over a Year!
- Corporate Employees: 8 Factors When Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Medicare Open Enrollment for Corporate Employees: Cost Changes in 2024!
- Stages of Retirement for Corporate Employees
- 7 Things to Consider Before Leaving Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
- Corporate Employees: Do NOT Believe These 6 Retirement Myths!
- 401K, Social Security, Pension – How to Maximize Your Options
- Have You Looked at Your 401(k) Plan Recently?
- 11 Questions You Should Ask Yourself When Planning for Retirement
- Worst Month of Layoffs In Over a Year!
A Note About Variable Annuities
Variable annuities are suitable long-term investments for funding retirement and are subject to market fluctuations, investment risk, and the prospect of principal loss. The fees and charges associated with variable annuities include, but are not limited to, mortality and expense risk charges, sales and renunciation (early withdrawal) charges, administrative fees, and fees for optional benefits and riders.
Caution: Prospectuses are used to sell variable annuities. Before investing, University of California employees should carefully consider investment objectives, risk, fees, and expenses. You can obtain the prospectus, which contains this and other information about the variable annuity, from the issuing insurance company or from your financial advisor. Before investing, you should peruse the prospectus carefully.
Caution: Depending on the issuer, certain clauses and options related to immediate annuities may be available for an additional fee or cost. Employees of University of California should review the annuity's prospectus or contract for a description of available options and any applicable fees and charges.
Immediate Annuity Payout Options
Life Only Annuity Option
This option provides a lifetime income guarantee. The income disbursements cease upon the demise of the annuitant. Although this option typically yields larger payments, it is possible that you will not survive long enough to receive the full return of your initial investment.
Installment Refund Annuity Option
If you are concerned that you will not live long enough to receive a full return on your investment, this alternative is available. Not only does the annuity issuer guarantee payments for the life of the annuitant, but it also guarantees that the total of these payments will never be less than the premium you paid to the issuer. If the annuitant passes away before your initial investment is repaid, the beneficiary you designate in the annuity contract will continue to receive payments until your initial investment is repaid in full.
Cash Refund Annuity Option
This option is very similar to the installment refund option, with the exception that if the total annuity payments received are less than the premium paid, your beneficiary will receive the difference in a flat sum (instead of periodic payments).
Life Annuity with Period Certain Option
With this option, the issuer of the annuity does not guarantee the rate of return on your investment, but it does guarantee a minimum payment period. If the annuitant dies before the end of the period you specified (typically between 5 and 50 years), payments will continue to be made to your beneficiary for the residue of the period, but no longer.
Joint and Survivor Annuity Options
This option provides a lifetime income guarantee for both joint annuitants. When one annuitant dies, payments continue for the remainder of the survivor's life. You may opt for these 'survivor' payments to remain the same or to be reduced to a proportion of the original payment, such as two-thirds. It is also possible to add the joint and survivor option to the life with period certain option. In this case, the annuity issuer will continue to make payments until both annuitants have passed away, or for the duration you specified, whichever is lengthier.
Joint and Contingent Survivor Annuity Option
This option provides a lifetime income guarantee for you and your joint contingent annuitant. In the event that you, the primary annuitant, pass away first, payments will continue. However, they will be reduced to 50% of the initial payment amount. If the joint contingent annuitant dies first, you will continue to receive your annuity payments without reduction for the remainder of your life.
Period Certain Annuity Option
This option provides a guaranteed payment for the period of time you specify (e.g. 5, 10, 15, or 20 years) as opposed to making payments for the annuitant's lifetime. If you pass away before the end of the specified period, your beneficiary will continue to receive payments for the remainder of the term.
Other Immediate Annuity Options
Cost of Living Adjustment (Inflation) Rider
This rider reduces the initial payment you would receive from the immediate annuity if the rider were not included, but subsequent payments increase by one to five percent annually. This provision is intended to mitigate the impact of inflation on the received income.
Impaired Risk (Medically Underwritten) Rider
This option may be added to an immediate annuity, or it may be sold separately. If you have a medical condition that reduces your 'actuarial' life expectancy, the impaired risk rider allows you to receive a larger income payment for the same premium or the same income payment for a reduced premium payment, based on your older, 'actuarial' age rather than your actual age.
Commuted Payout Rider
This rider permits you to withdraw a substantial sum from your immediate annuity in addition to the regular payments. This option is typically available for a limited time period and may be limited to a maximum dollar amount and/or percentage of the premium you paid to the annuity issuer.
Variable Payments
This feature enables you to withdraw a larger sum than your regular payment at specific times, such as the anniversary of your purchase.
Variable Immediate Annuity
Variable immediate annuities offer a variety of subaccounts, which are investment options. The value of your immediate annuity payments can rise or fall based on the performance of these subaccounts.
Immediate Annuity Strategies
While most financial experts recommend not investing all of your savings in an immediate annuity, there are a number of strategies involving immediate annuities that may be useful to you.
Fund Long-Term Care or Life Insurance Premiums
Many individuals have a need for long-term care and/or life insurance, but many of these individuals will not purchase either form of insurance due to its expense. For University of California clients who do not intend to use or expend an asset such as a CD, stock, or mutual fund, we recommend that they consider liquidating the asset and investing it in a single premium immediate annuity. You may use the annuity payments to cover the cost of premiums for long-term care insurance, life insurance, or both. The quantity of the immediate annuity payments will depend on your age, the premium paid to purchase the annuity, and the payment option you choose. This strategy enables you to convert an unused asset into a required one.
Provide Income for a Child with Special Needs or a Spendthrift
Some families are required to provide care for a child with special needs. It is essential to provide financial support for the infant after death. Investing a portion of your estate proceeds in an immediate annuity can provide a child with a constant stream of income throughout his or her lifetime.
What if you wish to leave your child an inheritance comparable to that of your other children, but are concerned that he/she will waste or misappropriate the inheritance to his/her detriment? A direct annuity can be used to regulate the flow of income to a child who is prone to frivolous spending.
In either case, you can stipulate in your will or trust that a specified quantity of cash be used to purchase an immediate annuity for your child upon your passing. Typically, the income from an annuity is paid into a special form of trust, which is established upon your death. This 'special needs trust' (or supplementary needs trust) is a tool for estate planning that allows you to provide for a disabled person's needs without jeopardizing his or her eligibility for government benefits. A spendthrift trust protects the beneficiary of the trust from creditors or other parties (such as a divorcing spouse). A spendthrift trust prohibits the beneficiary from transferring his or her interest, thereby preventing a creditor from gaining access to the interest. Consequently, immediate annuity payments within the trust are shielded from the majority of the beneficiary's creditors. A qualified attorney can assist you in establishing and administering these trusts.
Caution: in some jurisdictions, spendthrift trusts are invalid.
The Split Annuity Strategy
This strategy is intended to provide a steady income while preserving capital. A portion of a bulk sum is invested in an immediate annuity with a single premium and the remainder is invested in a deferred annuity with a single premium. The immediate annuity pays a fixed amount over a predetermined time period. The deferred annuity accrues interest at a fixed rate, with the intention that by the time the immediate annuity payments cease, the deferred annuity will have returned to its original principal amount. Then, you can resume the process with the current interest rate or reevaluate your University of California retirement and investment strategy as necessary.
The concept of a split annuity is a useful asset management instrument when fixed or regular payments must be made over a predetermined time period. For instance, the immediate annuity payments of a split annuity can be used to make mortgage payments while the deferred annuity grows back to the initial amount of your total investment.
In addition, a split-annuity strategy can be used in retirement to generate an immediate, consistent income stream while preserving a portion of retirement savings for the future. The deferred annuity is designed to grow to the initial amount of your investment; however, if you need access to your principal, the majority of deferred annuities permit penalty-free withdrawals.
Tax Treatment of Immediate Annuities
The payments received from a non-qualified annuity consist of a non-taxable portion representing the return of capital and a taxable portion representing the earnings on the annuity. As a consequence, only a portion (i.e., the portion representing premiums paid) is excluded from your gross income. Multiplying each annuity payment by an exclusion ratio yields the portion of each payment that is excludable. The exclusion ratio of a fixed annuity is equal to your investment in the contract multiplied by the expected return.
Example: You have an immediate fixed annuity that pays you $200 per month for twenty years. Your expected return is $48,000 based on $200 per month x 20 years x 12 months per year. If your contract investment is $24,000, then your exclusion ratio is $24,000/$48,000 = 50%. 100 percent of each $200 payment is therefore excluded from your gross income. The remaining $100 of the payment is considered ordinary income.
Caution: different principles apply to variable immediate annuities. Due to the fluctuating value of variable immediate annuity payments, it is impossible to estimate the expected return at the beginning of the annuity. Typically, the excludable portion is calculated by dividing the amount invested in the immediate annuity by the estimated number of years over which the annuity will be paid. This calculation may vary based on the annuitization option selected (e.g., life only, fixed period, etc.).
Estate Taxation of Immediate Annuities
If you choose a single-life payment option, your annuity payments will end upon your demise. As no portion of the annuity is transmitted, there are no estate tax ramifications.
If you purchase a joint and survivor immediate annuity, payments will continue for the remaining life of the surviving annuitant upon the demise of one of the joint annuitants. However, the value of the joint and survivor immediate annuity paid for by the deceased annuitant will be included in his or her estate. The included amount is the amount that the same annuity issuer would charge the survivor for a single life annuity as of the date of death of the first annuitant. If the survivor is the joint annuitant, the interest is eligible for the marital deduction. Additionally, the survivor receives a tax deduction for any estate tax attributable to the annuity.
Conclusion
An immediate annuity is like a steady paycheck that lasts as long as you live. It's like exchanging a lump sum of money for a reliable income stream that can cover your expenses during retirement. Just like a paycheck, the amount you receive depends on factors like interest rates and the payment option you choose. While an immediate annuity may not be the best option if you want to leave money to your heirs, it can provide a sense of financial security for those who prioritize a guaranteed income stream over potential investment returns.
How does the University of California Retirement Plan (UCRP) define service credit for members, and how does it impact retirement benefits? In what ways can University of California employees potentially enhance their service credit, thereby influencing their retirement income upon leaving the University of California?
Service Credit in UCRP: Service credit is essential in determining retirement eligibility and the amount of retirement benefits for University of California employees. It is based on the period of employment in an eligible position and covered compensation during that time. Employees earn service credit proportionate to their work time, and unused sick leave can convert to additional service credit upon retirement. Employees can enhance their service credit through methods like purchasing service credit for unpaid leaves or sabbatical periods(University of Californi…).
Regarding the contribution limits for the University of California’s defined contribution plans, how do these limits for 2024 compare to previous years, and what implications do they have for current employees of the University of California in their retirement planning strategies? How can understanding these limits lead University of California employees to make more informed decisions about their retirement savings?
Contribution Limits for UC Defined Contribution Plans in 2024: Contribution limits for defined contribution plans, such as the University of California's DC Plan, often adjust yearly due to IRS regulations. Increases in these limits allow employees to maximize their retirement savings. For 2024, employees can compare the current limits with previous years to understand how much they can contribute tax-deferred, potentially increasing their long-term savings and tax advantages(University of Californi…).
What are the eligibility criteria for the various death benefits associated with the University of California Retirement Plan? Specifically, how does being married or in a domestic partnership influence the eligibility of beneficiaries for University of California employees' retirement and survivor benefits?
Eligibility for UCRP Death Benefits: Death benefits under UCRP depend on factors like length of service, eligibility to retire, and marital or domestic partnership status. Being married or in a registered domestic partnership allows a spouse or partner to receive survivor benefits, which might include lifetime income. In some cases, other beneficiaries like children or dependent parents may be eligible(University of Californi…).
In the context of retirement planning for University of California employees, what are the tax implications associated with rolling over benefits from their defined benefit plan to an individual retirement account (IRA)? How do these rules differ depending on whether the employee chooses a direct rollover or receives a distribution first before rolling it over into an IRA?
Tax Implications of Rolling Over UCRP Benefits: Rolling over benefits from UCRP to an IRA can offer tax advantages. A direct rollover avoids immediate taxes, while receiving a distribution first and rolling it into an IRA later may result in withholding and potential penalties. UC employees should consult tax professionals to ensure they follow the IRS rules that suit their financial goals(University of Californi…).
What are the different payment options available to University of California retirees when selecting their retirement income, and how does choosing a contingent annuitant affect their monthly benefit amount? What factors should University of California employees consider when deciding on the best payment option for their individual financial situations?
Retirement Payment Options: UC retirees can choose from various payment options, including a single life annuity or joint life annuity with a contingent annuitant. Selecting a contingent annuitant reduces the retiree's monthly income but provides benefits for another person after their death. Factors like age, life expectancy, and financial needs should guide this decision(University of Californi…).
What steps must University of California employees take to prepare for retirement regarding their defined contribution accounts, and how can they efficiently consolidate their benefits? In what ways does the process of managing multiple accounts influence the overall financial health of employees during their retirement?
Preparation for Retirement: UC employees nearing retirement must evaluate their defined contribution accounts and consider consolidating their benefits for easier management. Properly managing multiple accounts ensures they can maximize their income and minimize fees, thus contributing to their financial health during retirement(University of Californi…).
How do the rules around capital accumulation payments (CAP) impact University of California employees, and what choices do they have regarding their payment structures upon retirement? What considerations might encourage a University of California employee to opt for a lump-sum cashout versus a traditional monthly pension distribution?
Capital Accumulation Payments (CAP): CAP is a supplemental benefit that certain UCRP members receive upon leaving the University. UC employees can choose between a lump sum cashout or a traditional monthly pension. Those considering a lump sum might prefer immediate access to funds, but the traditional option offers ongoing, stable income(University of Californi…)(University of Californi…).
As a University of California employee planning for retirement, what resources are available for understanding and navigating the complexities of the retirement benefits offered? How can University of California employees make use of online platforms or contact university representatives for personalized assistance regarding their retirement plans?
Resources for UC Employees' Retirement Planning: UC offers extensive online resources, such as UCnet and UCRAYS, where employees can manage their retirement plans. Personalized assistance is also available through local benefits offices and the UC Retirement Administration Service Center(University of Californi…).
What unique challenges do University of California employees face with regard to healthcare and retirement planning, particularly in terms of post-retirement health benefits? How do these benefits compare to other state retirement systems, and what should employees of the University of California be aware of when planning for their medical expenses after retirement?
Healthcare and Retirement Planning Challenges: Post-retirement healthcare benefits are crucial for UC employees, especially as healthcare costs rise. UC’s retirement health benefits offer significant support, often more comprehensive than other state systems. However, employees should still prepare for potential gaps and rising costs in their post-retirement planning(University of Californi…).
How can University of California employees initiate contact to learn more about their retirement benefits, and what specific information should they request when reaching out? What methods of communication are recommended for efficient resolution of inquiries related to their retirement plans within the University of California system?
Contacting UC for Retirement Information: UC employees can contact the UC Retirement Administration Service Center for assistance with retirement benefits. It is recommended to request information on service credits, pension benefits, and health benefits. Communication via the UCRAYS platform ensures secure and efficient resolution of inquiries(University of Californi…).
-2.png)
.webp)