Annuities are easy to explain to clients and can provide a basic income, says Julia Chung, wealth strategies practice leader at Facet Advisors in Langley, British Columbia
In particular, adds Susan St. Amand, president of Sirius Financial Services in Ottawa, annuities may become popular among Generation X clients who see their parents are living longer and want to make sure their own income will last until the end. However, the non-traditional way this generation approaches work will cause them to purchase guaranteed income products such as annuities even later. Some are taking a few years off to go back to school or travel, and she says many say they will continue to work after age 65.
For such clients, companies have designed products that guarantee capital while offering earning potential. One product combines aspects of deferred annuities with a mutual fund to compensate for the current low returns on fixed-income investments. It consists of two stages: five years of accumulation and 20 years of payments. The client makes a deposit and the money is invested in an investment fund for five years.
If it profits, the payout will increase. If not, her initial investment is protected and she gets her capital back in monthly installments over two decades. Such products “guarantee that you’re not worse off than if you had it in cash, but if there’s an increase, you can hold on to it,” explains Jason Pereira, a financial consultant at Bennett March and IPC Investment Corp. in Toronto.
However, customers should only buy five years before retirement, he says. Committing to a Gen X customer now means potentially losing decades of investment gains. “Losing a few percentage points each year to feeling safe over 20 years is huge.”
Moreover, the investment can only grow for the first five years, although without limits. The client loses further profits.
The capital guarantee is similar to market-linked GICs, capital-protected bonds and variable annuities, he adds. Another disadvantage: guaranteed income usually costs more than many mutual funds or pure income portfolios.
Insurers offer different variants of this product. There are segregated funds that guarantee a return of capital and have the option of converting investments into annuities. Some annuities recalculate payouts every three years to reflect investment gains.
As interest rates rise, policy values ​​should increase. However, if rates do not rise soon, the customer will gain little or nothing by making a long-term commitment. If a client is open to investing in the market, “you can make better money elsewhere and then save it for a direct annuity closer to retirement,” Chung says.
Read more: CREATE RETIREMENT STABILITY FOR GENERATION X
