How To Sell An Annuity

Annuities are financial instruments that pay income to an "annuitant" i.e. recipient who funds the annuity in earlier years. Annuities come in three types, fixed, variable and income and can be sold in two types of ways 1) pre-owned sale and 2) new annuities to clients. 

Annuity features may vary based on the insurance company managing the annuity and this can affect payment structure, fees, surcharges, terms of agreement etc. For this reason understanding the benefits and costs of selling an annuity is important to the successful sale of one. Before selling an annuity it may be beneficial to understand the reasons for the sale as well as the dynamics involved. This article will discuss the types of selling applicable to annuities.

Two kinds of annuity sales

1. Client to buyer sales

In a client to buyer sale an annuity holder or annuitant essentially decides to sell an existing annuity income stream or cash out the value of annuities income stream. The annuity may not be salable if it is held within a retirement plan such as an IRA or Employer managed retirement account. A whole annuity does not have to be sold as partial sales are also possible. Annuities can be sold back either to Insurance companies or on secondary markets. The former is the faster approach but may incur significant surrender charges and less potential for profit.

To sell an annuity to a buyer other than the insurance company, one may wish to research companies known to purchase annuities second hand. The reasons some companies do this is because they can make a profit on the annuities present value before the future value to the client becomes payable. In other words, it is kind of like buying money at a discount for reinvestment and/or resale at a profit. A few of the companies that deal with this type of selling can be found in the sources listed in this article, specifically the article published by bankrate.com and setcap.com.

2. Insurance company to client

Another way to sell an annuity is to clients. Typically, insurance companies are experienced in this area and train their underwriters on both annuity plans and selling techniques. In recent years a controversy has arisen over the sale of annuities due to high commissions and aggressive selling techniques that have caused some companies to be sued. When being sold an annuity, it is advisable to understand all the fees, surcharges, maintenance costs, insurability, guarantee and details of the annuity. If the annuity provides a reasonable rate of return after the service costs are deducted, then it may be an advantageous tax deferred use of money that may also offer garnishment protection, guaranteed future payments and varying rates of returns.

Tips to consider when selling an annuity

Before selling an annuity, it can be a good idea to think about all the factors, costs, implications and reasons behind the sale in addition to investigating different potential buyers of the annuity. Having a good understanding of the dynamics behind an annuity sale can help make the decision to retain or sell an annuity more sound. Below are a few tips that one may ponder before selling an annuity.

• Contact the Annuity Manager: The Insurance company may want to talk around selling, but they should have all the details available
• Contact a Settlement Company or Lawyer: If the insurance company refuses to sell the annuity, contact a third party such as Settlement Capital Corporation for additional assistance.
• Calculate the advantages of cashing out an annuity income stream
• Weigh The tax implications of the income from sale against potential return on income
• Contemplate purposes of selling an annuity to justify the rationality
• If reinvestment of the sale amount of the annuities present value yields a greater return than the future value of the annuity after fees and costs, selling may be a good idea.

The selling of annuities by annuity holders is a relatively new phenomenon and is a result of an evolving securities market in which cash and financial derivatives improve operational ability of financial institutions, cash flow and liquidity within financial markets. Annuity sales provide both individuals and financial institutions more financial options to improve financial management, efficiency of operations. The annuity sale process may not always be worthwhile therefore it is important to consider all the selling options and charges involved in the sale.

Sources:

1. http://www.investorwords.com/225/annuity.html
2. http://www.investorwords.com/223/annuitant.html
3. http://www.bankrate.com/brm/news/insurance/20070507_annuity_secondary_market_a1.asp
4. http://www.setcap.com/settlementcapital/aboutus.aspx?pt=aboutus
5. http://www.fool.com/personal-finance/retirement/2005/08/04/the-quotcriminalsquot-who-sell-annuities.aspx

Is a pension taxable?

Pensions are often taxable when they are contributed to using pre-tax dollars. In other words, if your employer takes money out of your paycheck before deducting taxes, your taxable income becomes lower making the contribution pre-tax. When the time comes to withdraw from the pension, the income may then be taxed.(1)

• Taxable and partially taxable pensions

In the case of pensions contributed to with after-tax dollars, the amount contributed to the pension plan is tax-free when it is a qualified distribution. Qualified distributions meet specific criteria such as contribution amount which are enforced by tax regulators such as the U.S. Internal Revenue Service.  Overall tax on contributions can be reduced further with the savers credit in some cases. According to the IRS, the savers credit allows an annual tax credit up to $1000 for single tax payers with incomes below set limits who make contributions to applicable pension plans.

Retirement income from Roth IRAs is subject to qualified distributions, but earnings on the post-tax contributions are tax deferred meaning it is taxable upon withdrawal. In other words, since Roth IRA contributions are post-tax, those contributions are generally non-taxable upon withdrawal.  However, a tax penalty of 10% applies to non-qualified pension withdrawals; for example, withdrawals prior to age 59.5 years of age.(1)

• Tax exempt pensions

Some pensions are exempt from taxation; examples of these pensions include Veterans pensions and Railroad worker pensions. Depending on which state one resides in, pension income may or may not be taxable as states are allowed to tax or not tax income independently of the federal government.(2)
• Pension laws and rules

Several laws regulate pensions including the Employee Retirement Income Security Act (ERISA), the Pension Protection Act of 2006 and tax regulations set forth in Title 26 of the U.S. Code.  IRS instructions and rules regarding pension income can be found in IRS Publication 575.

The taxation of pensions can be affected by a number of circumstances and rules; for example rollover of non-qualified pensions to qualified pensions may be taxable prior to rollover or as a condition of rollover. In other words, if a pension contributed to with pre-tax dollars is rolled over into a pension typically contributed to with post-tax dollars, the portion of the pension that was pre-tax will become taxable upon withdrawal.

An important determinant of pension taxation is the cost i.e. the amount contributed to the pension plan by the employee.  As with Roth IRAs, earnings on money put into a retirement plan is generally not exempt from taxation; for example capital appreciation or capital gains. Pension income that is not withdrawn during retirement may be subject to an additional 50% tax if it does not meet the minimum IRS distribution amount.(5) In the case of estate transfer, pension income with a trust fund beneficiary may avoid estate taxes.

• International pension income

International pension income may be taxable in the country of origination and partially exempt from tax in the U.S. depending on the pension type, and specific tax treaty agreement between the countries.(4) The IRS recommends contacting the country's Department of Revenue to clarify how the pension income should be taxed. The IRS also claims that in cases of Social Security Income from other countries, the pension income is typically taxable in the country of origin.  

Sources:

1. http://bit.ly/9L8dVH (Internal Revenue Service)
2. http://bit.ly/jeOTK (Retirement Living)
3. http://bit.ly/cOeBcu (Department of Labor)
4. http://bit.ly/cjPoR6 (IRS: International pensions)
5. http://bit.ly/bJENMf (IRS: Publication 575)