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Before you purchase an annuity, it’s important to understand the entire purchasing and sale process, including how to split an annuity.
Investing in an annuity can be the solution to securing your retirement nest egg. An annuity is a low-risk financial investment used to protect financial assets. Contributions to an annuity account are tax-deferred, accumulating interest over a set period of time until payment distributions begin.
Annuities can also be shared in a joint ownership, an option common for spouses. In a jointly owned annuity, both owners have rights to the account.
No action can be taken by one party to the account independently, specifically for withdrawals. If one spouse decides to withdraw from the jointly owned annuity, both spouses must approve this action, and any other action to exercise their annuity rights in writing.
Pros and Cons of Buying an Annuity
In addition to guaranteed income, purchasing an annuity has a number of benefits.
- A tax-deferred status, allowing the investment to grow tax-free until withdrawn
- Lifetime income to prevent outliving your investment
- A death benefit allowing the transfer of payments to a spouse or surviving beneficiary after an annuity owner’s death
- Principal protection to ensure the annuity owner or beneficiary receives the initial investment amount
- A customizable contract providing annuity owners the opportunity to specify how the annuity is disbursed and how frequently
Though annuities include a number of benefits, they also come with a set of drawbacks.
- High costs, including commission, management and annual fees
- Inflexible contracts prohibiting any last minute changes to payout terms in the event of a financial emergency
- Expensive surrender charges if funds are withdrawn before the age of 59 ½ or exceed the annual limit
Just as annuities can be jointly shared between two parties, they can also be split. Divorcing couples often choose to split their annuity as marital property, and financial assets are divided. Splitting an annuity involves splitting the original contract and issuing two new identical contracts with the same benefits, values and death benefits. The process can become complicated for insurance companies for this circumstance, and the split annuity will no longer be taxable at the time of transfer.
- Full or Partial Withdrawal
- A full or partial withdrawal from an annuity directly distributes the money to the appropriate owner.
- Direct IRA Transfer
- Transferring annuity assets allows the owner to move a dollar amount or percentage of the original contract directly into an IRA account.
- Withdraw to New Contracts
- Rather than splitting an annuity and accruing tax liabilities, annuity owners can withdraw from the original contract, allowing insurance companies to issue two new contracts with new account values and benefits.
- Transfer Ownership
- In some divorce settlements, full ownership is transferred to one party and a new contract is created with updated terms.
It is important to note that with any withdrawal, there may be surrender charges and penalty fees. In addition, any funds withdrawn from an annuity account that includes beneficiaries can reduce the amount the owners receive in guaranteed income.
In the event that you need cash now, you can choose to sell your annuity contract in exchange for immediate access to savings.
- Partial Sale
- Annuitants may choose to sell a portion of their savings for a lump sum while still being able to receive periodic payments at a later date. For example, if a retiree needs cash for a down payment on a home, they can sell the first 3 years of their annuity payments for a lump sum. After the third year, annuitants receive the remaining periodic payments until the end of the contract term.
- Reverse Partial Sale
- Similar to the partial sale, annuity owners can sell a portion of their payments while still being able to receive periodic payments at a later date. Annuitants with a 30-year annuity account can sell years 10 through 15 of their payments, enabling them to receive payments now and after year 15.
- Split Disbursement
- If an annuitant is set to receive an excess amount in periodic payments they won’t need, they can sell that portion and receive the remainder in periodic payments. For example, if an annuity owner receives $5000 a month from their account but only needs half that amount, they can sell their excess in exchange for a lump sum. As a result, they would be receiving $2500 monthly rather than the larger amount.
No matter which option you choose, the selling process does involve court approval. Be sure to discuss your options and the selling process with a financial advisor or lawyer.
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Pros and Cons of Selling Annuities
When life deals you an unexpected hand, selling an annuity may be the best solution to navigating through bills, excess expense and unexpected debts. Before making the decision to sell, it is important to weigh the pros against the cons.
- Immediate income to alleviate debt, medical expenses, and other large payments
- The opportunity to invest in other projects or financial tools
- The amount received in a lump sum may be worth more now than if you would receive it later, due to inflation
Selling an annuity also has drawbacks.
- Discounted payout since selling your annuity decreases the initial value that you’ll receive as a lump sum
- No more guaranteed income
- No a guarantee that a judge will approve your decision to sell
- Surrender charges that could amount to as much as 10 percent
4 Cited Research Articles
- Johnston-Roche, M. (2016, December 6). Pros and Cons of Annuities. Retrieved from https://www.annuitieshq.com/articles/pros-and-cons-of-annuities/
- Steiner, S. (2016, December 7). 5 pros and cons of investing in annuities. Retrieved from http://www.bankrate.com/retirement/5-pros-and-cons-of-investing-in-annuities/
- Stolz, S. (2016, April 25). Divorce and Annuities: A Costly Combination. Retrieved from http://www.thinkadvisor.com/2016/04/25/divorce-and-annuities-a-costly-combination?slreturn=1505993355
- Vasileff, L. (2016, August 2). Understanding the Trickiness of Dividing Annuities in Divorce. Retrieved from https://www.iris.xyz/solutions/divorce/understanding-the-trickiness-of-dividing-annuities-in-divorce