Question on 1035 Annuity Exchanges

I have an annuity with a 7 year surrender period that decreases 1% every year. I am about to enter year 5, brininging my surrender value down to 2% around $600. If I was to perform a 1035 exchange to another product, with a different company, would the surrender value be exchanged, or would the entire contract amount be exchanged?

For a simple example, let's say my contract value is $30,600 and my current surrender value is $30,000. Which amount would be transfered to the new product? If it is the full amount, would the new product reset to a 7 year surrender period (or whatever I choose), or would it be "grand-fathered" in with only 2 years remaining?

Let me know if you need additional information to answer the above questions. Thanks.

Reply to
ChiSaver
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You lose the surrender value. If 2% is $600, then when you make the exchange, your current balance minus $600 is what arrives at the new company.

You'll have a whole new contract with whatever terms the new company agrees with you on. There *are* annuities with no surrender fees at all. I'd strongly encourage you to look into them before signing onto another 7 years.

The first question you should be asking before doing any of this is whether or not an annuity is appropriate at all. The second is whether the one you've gotten matches those needs - and the third is whether there's another one which works better for you.

Perhaps if you told us more about your sitution, we could suggest something better? In my experience, most VAs are horrendously overpriced and very often inappropriate. But there are folks here with vastly more experience with them than I have.

Reply to
BreadWithSpam

The amount that would be available for the 1035 EXCHANGE would be the current value less the current surrender charge.

the new company (if they have a surrender charge) would then apply that surrender charge to the new contract. ie: you would be a loser on BOTH contract should you decide to 1035 NOW..... There is NO Grandfather Clause in 1035 exchange of Annuties. Cal Lester CLU

Reply to
Cal

Thanks for the answer, Bread. This was my assumption.

I think our situation is one of the few where a well priced annuity may make sense. When we initially purchased the annuity, we were both maxing out our 401k's and were above the income limits for Roth IRA contributions. We were young (and some may say foolish) at 25 and 26 respectively and were looking to find another vehicle with tax deferred growth. The annuity that we choose had a 7 year surrender period, but the fees are somewhat low for this type of investment (~1.25%). While we haven't added to it, and don't plan to in the future, I believe that exchanging this product for a similar one at another company is better than cashing out and paying the penalty.

One note of clarification: We moved our money from one brokerage to another a few years back. The only thing we have left at the old firm (Merrill Lynch) is this annuity. The account that it resides in carries a $100 a year fee. I am trying to balance when to move it vs the cost of moving it. Thanks again for your answer.

Reply to
ChiSaver

We've discussed this situation here on this list a few times and it's an area where it's not a no-brainer whether one makes sense or not. It's very easy to come up with scenarios where, say, putting after-tax money into regular but tax-efficient mutual funds (ie. certain index funds, etc) easily beats the annuities in long term after-tax spendable return - and that's before even getting into the issue of what are generally very high expenses.

ie. a VA as purely a tax-deferred retirement savings vehicle is usually not a great choice.

Those fees are still rather outrageous if the only point of the VA is tax-deferred growth. (They probably include coverage of a death-benefit of some sort which you may have no need for, for example, not to mention a nice fat profit margin for the VA company - and that 1.25% may or may not include the expense ratios on the underlying subaccounts).

Egads - it gets worse! That $100/yr is just insult on top of injury.

Take a look into (this is just an example - there are other very similar products out there!) Fidelity's Personal Retirement Annuity. They charge only 0.25%/yr (on top of actual fund expenses) with no death benefit or other stuff. Vanguard's got a similar one (with admin fees of 0.10%, M&E adds 0.2% and the management fees of the portfolios all under 0.44%) and does T.Rowe.

If your surrender fee is going to be $600 (2%) and you are going to pay $100/yr for the next two years, during those two years, you not only are out $200 of that $600 anyway, but the VA company's pocketing probably $600 in additional unnecessary drag (say, 1% a year too much) in expenses on your investments. You can run the math comparing real annual expenses between what you've got now and what the alternatives are.

Reply to
BreadWithSpam

I understand and agree that the fees on annuities generally eat away at any benefit of owning them. I appreciate your suggestions for lower cost options given that we are where we are and we might as well make the best of it. To tell you the truth, I am glad, in a way, that I was able to learn such a valuable financial lesson at an early age and with relatively little at stake. My financial strategy is much more sound now given some of the pain I went through early, both with this annuity and the dot com crash. The biggest lesson I have learned over the years is to completely understand every investment made, including risk and fees, before even thinking about dumping money into it. It has been this group along with other research that has really helped me along the way.

Reply to
ChiSaver

ChiSaver,

Rarely does a 2% surrender actually equal a 2% surrender. Most annuities allow a 10% penalty free withdrawal annually and anything above that is penalized at the current surrender %. So you actually pay a 2% surrender charge on only 90% of the account value (1.8% actual surrender charge). You should check your specific contract. If your statement gives a "surrender value" then they've already done the leg-work for you.

Like some of the other guys said, a 7 year surrender is on the high end. Look for new annuities with 4 yr or no surrenders. The no surrender contracts often have higher M&E charges. Because of this, 4 Years surrenders may be more suitable.

Lastly, stay away from products with a bonus. Many agents will argue that a 5% sales credit/bonus will ease the sting of the 2% surrender you just paid. What they don't tell you is that you get charged higher M&E every year in exchange for that bonus. After 12-14 years the higher M&E catches up with you.

~kastnna

"Measure twice, Cut once"

Reply to
kastnna

Nevertheless, there are VAs with no surrenders with very very low M&Es. I mentioned two such in my other post.

Inasmuch as the OP was looking for retirement investments, not insurance features, there are certainly suitable vehicles with very much lower expenses and no surrenders and I encourage him to look into them. Worst case, since they have no surrenders, should he decide that he does want some of those insurance features later, there'll be no new cost to do another echange later on.

True enough. Look at expenses. Always. It isn't always bad to pay a bit more - if you're getting something for those higher expenses that you want/need. Unfortunately with VAs, often enough, folks are paying heaps and heaps of money for things they really don't want or need.

Reply to
BreadWithSpam

I have an annuity with a 0.4% cost (including insurance fee) and no penalties other than the IRS 5-year surcharge. They are out there.

Reply to
rick++

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