Investment only variable annuities are a type of annuity product that does not provide any guarantees on investment returns or income payments. Unlike traditional variable annuities that offer guarantees like lifetime income streams, investment only variable annuities simply invest contributions into underlying investment funds, which provide varying returns based on the performance of stocks and bonds. The key benefit of these annuities is to gain tax-deferred compounding growth potential on savings, but they also come with higher fees compared to investing directly in mutual funds. Investors seeking the tax advantages of annuities without the complex guarantees could consider an investment only variable annuity as an option.
Key features of investment only variable annuities
The defining feature of investment only variable annuities is the lack of guarantees on investment performance or lifetime income. These annuities operate similar to investing in mutual funds within a tax-advantaged account, but with typically higher annual fees charged by the insurance company issuing the annuity contract. The funds underlying the annuity can invest in stocks, bonds, or a mix of both to pursue growth. However, the account value and payouts can rise or fall based on fund performance, rather than being backed by insurer guarantees. Annuity investors bear the full investment risk in exchange for tax-deferral benefits.
Advantages and disadvantages of investment only variable annuities
The main advantage of investment only variable annuities is the potential for tax-deferred compound growth compared to regular taxable investment accounts. They also provide the option for lifetime payouts in retirement. However, these annuities tend to charge higher annual fees for contract administration and fund investment management. There are also no guarantees protecting savings or income in down markets. Investors need to weigh tax-deferral benefits against higher costs that can impact long-term returns.
In summary, investment only variable annuities offer tax advantages for retirement savings similar to traditional variable annuities but without complex guarantees tied to investment or lifetime income performance. Their suitability depends on an investor’s need for tax deferral, risk tolerance, time horizon, and overall portfolio construction.