Treasury Regulations Mean Increased Need for Advisory Services in Annuities

Both financial advisors and their clients know how valuable the strategic use of annuities can be for retirement planning.

In fact, a recent study from the Life Insurance Management Research Association found that nearly 9 in 10 annuity owners are confident regarding their retirement lifestyles.

What’s more, while some advisors must convince their clients to employ certain financial strategies, many individuals pursue a fixed annuity already confident in its ability to provide them with security in retirement.

“Our findings challenge the adage that annuities are ‘sold not bought,'” Jafor Iqbal, associate managing director at the LIMRA Secure Retirement Institute, said in a media release. “We found that investors know about annuity features and go into the process with a positive attitude which directly influences the purchase decision.”

Now, new regulations put in place by the the U.S. Department of the Treasury could open the door to more clients benefiting from the unique advantages offered by annuities.

Treasury tackles minimum distribution rules

The Treasury’s new regulations concern when qualified plan owners must start taking withdrawals from deferred income annuities and begin paying taxes on them.

“These regulations will provide the public with guidance necessary to comply with the required minimum distribution rules under section 401(a)(9) applicable to an IRA or a plan that holds a longevity annuity contract,” the IRS stated in a bulletin. “The regulations will affect individuals for whom a longevity annuity contract is purchased under these plans and IRAs (and their beneficiaries), sponsors and administrators of these plans, trustees and custodians of these plans and IRAs, and insurance companies that issue longevity annuity contracts under these plans and IRAs.”

As outlined by LifeHealthPro in a Dec. 2 article, qualifying longevity annuity contract eligibility now requires:

  • Contracts to make up a limit of 25 percent of any employment retirement plan or 25 percent across all pre-tax IRAs aggregated together (contracts can also not have a cumulative dollar amount of more than $125,000, up from $100,000 previously)
  • Contracts to begin payouts by age 85 or earlier
  • Contracts to forgo variable or equity-indexed payouts in favor of fixed payouts
  • Contracts to not contain a cash surrender value once purchased

DIAs that meet these requirements can be excluded from required minimum distribution calculations.

According to the IRS, the new rules were intended to make DIAs more accessible for individuals with 401(k)s and IRAs.

“All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings,” J. Mark Iwry, senior advisor to the secretary of the Treasury and deputy assistant secretary for retirement and health policy, stated in a press release. “As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

More access means greater demand

According to LIMRA, the new regulations are expected to lead to more demand for annuity options. That means greater need for advisory services and the potential for increased annuity sales.

While the current rules exclude variable and indexed annuities, the final regulations allow the IRS Commissioner to make exceptions in the future.

“This significant caveat leaves open the possibility that the market for QLACs, while almost certain to expand regardless, has the potential to grow substantially in the future if annuity carriers are able to convince the Treasury that variable and indexed annuities should be included as QLACs,” LIMRA stated in a recent report.

The new rules make now the ideal time for financial professionals to help their clients explore fixed annuity options. There’s no denying that guaranteed income can be a huge boon for retirees down the line, and with access to these products being expanded for individuals with 401(k)s and IRAs, financial professionals are in position to help their clients gain even more peace of mind during the retirement planning process.

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