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Treasury clears way for longevity annuities in 401(k)s, IRAs: treasury amends required minimum distribution rules to allow annuity investors to start collecting later, treasury's Iwry says.

The Treasury Department and the Internal Revenue Service issued final rules on July 1 to make longevity annuities--which provide regular payments that begin at an advanced age and continue throughout the individual's life--accessible to the 401(k) and IRA markets.

The new rules are "effective immediately," Mark Iwry, senior advisor to the secretary of the Treasury and deputy assistant secretary for retirement and health policy, said to applause at the Insured Retirement Institute's Government Legal & Regulatory Conference in Washington.

"We think this helps advance lifetime income in a way that we haven't seen before," IRI President and CEO Cathy Weatherford said.

Iwry told IRI attendees that Treasury has amended its required minimum distribution rules so that longevity annuity payments will not need to begin prematurely in order to comply with those regulations.

"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," Iwry said.

The change to the required minimum distribution rules will make it easier for retirees to consider using lifetime income options. "Instead of having to devote all of their account balance to annuities, retirees who wish to follow a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments will be able to do so," Iwry said.

He explained that the final rules expand upon proposed rules on longevity annuities that the Treasury issued previously as part of a broader effort with the Department of Labor to encourage lifetime income.

"We've tried to keep this flexible so that the industry can continue to innovate" in the longevity annuity area, Iwry said.

Treasury says that the rules are "largely consistent with the proposed regulations, but respond to public comments" by expanding the permitted longevity annuities in several respects, including:

* Increasing the maximum permitted investment: Under the final rules, a 401(k) or similar plan, or IRA, may permit plan participants to use up to 25% of their account balance or (if less) $125,000 (up from $100,000 in the proposed regulations) to purchase a qualifying longevity annuity without concern about noncompliance with the age 70 1/2 minimum distribution requirements. The dollar limit will be adjusted for cost-of-living increases more frequently (in $10,000 increments instead of the $25,000 increments under the proposed rules for adjustment of the previous $100,000 limit).

* Allowing "return of premium" death benefit: Under the final rules, a longevity annuity in a plan or IRA can provide that, when purchasing retirees die, the premiums they paid but have not yet received as annuity payments will be returned to their accounts. This option may appeal to individuals seeking peace of mind that if they die before receiving the annuity, their initial investment can go to their heirs. The proposed regulations had permitted a life annuity payable to a designated beneficiary after the annuity owner's death, but not this type of "return of premium" upon death.

* Protecting individuals against accidental payment of longevity annuity premiums exceeding the limits: The final rules permit individuals who inadvertently exceed the 25% or $125,000 limits on premium payments to correct the excess without disqualifying the annuity purchase.

* Providing more flexibility in issuing longevity annuities: The proposed regulations provided that a contract is not a qualifying longevity annuity contract unless it states when issued that it is intended to be one. In response to comments, the final rules facilitate the issuance of longevity annuities by allowing the alternatives of including such a statement in an insurance certificate, rider or endorsement relating to a contract. IA

Deferred Income Annuities: More Than Just Longevity Insurance

In the ongoing hunt for stable, pension-like retirement income sources, deferred income annuities (or DIAs) are heating up as an increasing number of insurance carriers have begun to offer the products. Unfortunately, many clients continue to view DIAs only as a type of longevity insurance that can protect against the risk of outliving traditional retirement savings. As the market for these products expands, however, this common view has become more and more inaccurate-causing many clients to miss out on a product that can function as a powerful component in any retirement income portfolio.

Keeping current with respect to the flexible nature of these products can mean the difference between creating a well-rounded retirement income portfolio or missing the opportunity to purchase when the time is right.

DIAs: Common Misconceptions

In many cases, when clients hear about deferred income annuities, they think of an annuity product that requires an extended deferral period in order to begin payouts when the client reaches old age. While this type of product can be extremely useful in protecting the client against the risk of outliving his or her assets, many clients feel that the investment will be wasted if they do not live through the extended deferral period.

In reality, however, this form of longevity insurance is only one type of deferred income annuity, and many DIAs allow the client to choose to start receiving income within as little as 13 months-or as long as 45 years-after purchasing the contract. Clearing up this common misperception can vastly expand the use of deferred income annuities among clients-especially when they discover the flexibility that the DIA product can offer.

Finding Flexibility With DIAs

While clients have the option of choosing an annuity starting date that begins relatively quickly or far into the future with DIAs, these products often will allow the client to change the annuity starting date that he or she originally chooses. This gives the client flexibility, as circumstances can change over a longer deferral period.

Along the same line, DIAs can also protect against inflation risk by providing for cost of living adjustments that can give clients certainty that their income needs, which are always difficult to anticipate, will be met, even if the annuity starting date is as far as 45 years into the future.

Many deferred income annuities also allow clients to collect nonguaranteed dividends over the life of the annuity product. Clients have the option to collect the cash dividends offered or can reinvest the dividends into the annuity product to increase the guaranteed income stream.

This option gives clients the flexibility to invest dividend income elsewhere in strongly performing equity markets but also allows them to keep the added income within the secure annuity product in a down market.

Further, while a traditional annuity will usually require the client to make one large lump sum payment to purchase the annuity, many deferred income annuities allow the client to make multiple contributions. This lets the client spread the purchase over a period of time prior to the income starting date, which can alleviate some of the downside risk of locking a large portion of his or her savings into the contract with no expectation of return for several years.

The expanding market for deferred income annuities has made these products increasingly useful for clients looking to lock in a secure retirement income source. Dispelling the common misperception that these products are only useful in protecting against extended longevity, however, is crucial to helping clients see the ever-increasing utility of the DIA.

--William Byrnes and Robert Bloink

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@summitpronets.com.
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Title Annotation:RETIREMENT PLANNING
Author:Waddell, Melanie
Publication:Investment Advisor
Date:Aug 1, 2014
Words:1235
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