Preoccupied by a battle over federal spending, Congress has barely begun considering another piece of budget balancing: comprehensive tax reform.
Although the idea is germinating, the insurance industry is launching a campaign to protect tax advantages for annuities.
In a report released last Monday, the Insured Retirement Institute said that tax-deferred earnings on annuities mostly benefit middle-income investors. According to the study, 80% of annuity purchasers make less than $100,000, and 64% make less than $75,000.
The IRI said that it put together the report to educate several different audiences — policymakers, investment advisers and consumers — about the role that annuities play in boosting retirement savings.
Congress will decide whether to eliminate the tax-deferred status of the products in an effort to raise revenue to address the yawning budget gap. Annuity holders don't 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 wasn't 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,” according to the IRI report. “This would be cumbersome for the majority of annuity contract holders, who are primarily the middle class.”
Annuities are an important product for Americans, who increasingly must provide for their own retirement income as defined-benefit pensions have declined in favor of defined-contribution options, said Cathy Weatherford, the IRI's president and chief executive.
“Millions of Americans are looking for ways to provide themselves with the "mailbox money' that will give them a guaranteed paycheck for life,” she 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.
Variable annuities can be a good investment, but consumers have to be careful about wading into the market, said Barbara Roper, director of investor protection at the Consumer Federation of America.
“They are arguably among the more costly, oversold investment options available,” she said.
“[Insurance organizations'] pitch on variable annuities would be more convincing if they cut down on abusive sales practices in the industry,” Ms. Roper said.
E-mail Mark Schoeff Jr. at [email protected].
