Deferral denial? Annuity tax alteration would wound middle class

Preoccupied by a battle over federal spending, Congress has barely begun considering another piece of budget balancing — comprehensive tax reform. While the idea is germinating, the insurance industry is launching a campaign to protect tax advantages for annuities.

In a report released Monday, the Insured Retirement Institute asserted that tax-deferred earnings on annuities mostly benefit middle-income investors. The study shows that 80% of annuity purchasers make less than $100,000 and 64% make less than $75,000.
The organization said it put together the report to educate several different audiences — policymakers, investment advisers and consumers — about the role annuities play in boosting retirement savings.

Congress will decide whether the tax-deferred status of the products will be eliminated in an effort to raise revenue to address the yawning budget gap. Annuity holders do not have to pay taxes on the vehicles until they make a withdrawal, allowing them to build up tax-free.

A national deficit commission in December recommended ending all so-called tax exclusions in order to lower individual rates. The panel’s report was not sent to Congress for a vote, but its ideas could find their way into legislation.

The IRI and other insurance advocates want to make sure that the annuity tax deferral is protected. The IRI argues that the tax breaks are crucial to helping people build a retirement nest egg.

“Although the removal of tax deferral would not necessarily result in a smaller accumulated value, the owner would need to tap other sources for the funds to pay the tax, reducing long-term savings in the process,” the IRI report states. “This would be cumbersome for the majority of annuity contract holders, who are primarily the middle class.”

Cathy Weatherford, the IRI’s president and CEO, said that annuities are an important product for Americans who increasingly must provide for their own retirement income, with the decline of defined-benefit pensions in favor of defined-contribution options.

“Millions of Americans are looking for ways to provide themselves with the ‘mailbox money’ that will give them a guaranteed paycheck for life,” Ms. Weatherford said in a statement. “Annuities, and their tax deferred status, are uniquely poised to provide middle-class Americans with the retirement peace of mind they seek.”

Annuity advocates will have to overcome skepticism about the products that revolves around their complexity and the sales techniques used to promote them.
Barbara Roper, director of investor protection at the Consumer Federation of America, said that variable annuities can be a good investment. But consumers have to be careful about wading into the market.

“They are arguably among the more costly oversold investment options available,” Ms. Roper said. Insurance organizations’ “pitch on variable annuities would be more convincing if they cut down on abusive sales practices in the industry.”