|By TARA SIEGEL BERNARD|
New tax rules will make it possible for workers to buy a type of annuity often called longevity insurance inside their retirement plans. The annuity aims to protect people from exhausting their savings in their later years.
Longevity insurance is actually a deferred-income annuity, in which a person pays a lump sum premium to an insurer in exchange for a guaranteed lifetime income stream that begins several years later — perhaps well into the person’s 70s or 80s. Until now, these annuities could not be widely used in 401(k) retirement plans and individual retirement accounts because those plans require account holders to begin withdrawals — known as required minimum distributions — at age 70½.
But on Tuesday the
“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 can live,” said J. Mark Iwry, the Treasury’s deputy assistant secretary for retirement and health policy. The new rules take effect immediately.
To avoid the distribution rules, however, retirement plan participants can use no more than 25 percent of their account balance, or
The annuities must also be relatively basic and cannot be larded with many of the special features — like inflation riders — that insurers sell in the commercial market. But annuity providers will be permitted to sell a feature that guarantees that the annuity owner’s beneficiaries will receive the premium amount originally paid, minus any payments already made. They can also provide an option that would continue paying the income to a beneficiary after the annuity owner’s death.
Though these options either cost more upfront or will ultimately reduce the income stream, insurance providers say many people buy them anyway because they are reluctant to part with such large sums with no guarantees. Treasury officials said that they wanted people to feel comfortable buying the annuities but that they also did not want to permit insurers to sell too many features that would reduce the income stream. Having more special options would also make it more difficult for workers to compare prices across providers.
It remains to be seen if the new rules prompt more 401(k) providers to offer annuities. According to the
Buying an annuity that doesn’t begin making payments until much later — perhaps more than a decade — is more cost-effective than buying an annuity at retirement and collecting the income immediately. The reason is straightforward: There is a higher chance the individual will not live long enough to begin collecting payments, and the money from people who die earlier benefits those who live longer.
Take a 68-year-old man who buys an income annuity and immediately begins collecting lifetime income of
According to Treasury officials, workers will have some flexibility when making their purchases. A person can, for instance, buy the annuities at age 58 or 68 and delay taking payments until age 80 or 85.
But as with homeowner’s policies and other types of insurance, the idea is to pay a smaller amount of money now for more protection later. “You’re buying protection against risk — in this case, the risk of outliving your savings,” Mr. Iwry said.
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|Source:||New York Times Digital|