Fixed annuities find favor

The Wall Street Journal

The hottest product on Wall Street these days is the lowly annuity.

With the stock market heading toward its third straight losing year, investors seeking stable returns are pouring record amounts of cash into fixed annuities. These products, like bonds and certificates of deposit, offer a guaranteed rate of return, an enticing proposition in the current market. Rates today for many fixed annuities are above 5 percent. In addition, just as in a 401(k), you don't pay taxes on your profits until you withdraw the money.

All but shunned while the stock market was soaring, fixed annuities hit a record $29.5 billion in sales in the second quarter, up 72 percent from a year ago. At Hartford Finance Services Group, fixed-annuity sales topped $1 billion in the first half of the year, more than triple their year-earlier level. And year-to-date sales of fixed annuities have reached $2.5 billion -- also a record -- at ING Group's wholesale-distribution division, up dramatically from $840 million a year earlier.

One key factor: Banks, pitching a widening array of products as they compete against other giant financial-services firms, are pushing annuities hard as interest rates plunge on CDs and savings accounts.


But people need to consider carefully what type of annuity, if any, is right for them. Most carry surrender penalties, charges that investors must pay if they cash out before a designated date. Those penalties can apply for as long as 17 years and include fines of as much as 25 percent of the annuity's value. That's far more onerous than the one-month's interest typically lost when cashing out of a CD early. Because annuities are generally treated as retirement vehicles, investors younger than 591/2 years old pay a tax penalty for withdrawing money from an annuity.

And though annuities accumulate profits on a tax-deferred basis, they are ultimately taxed at unfavorable ordinary income rates. Stock and mutual-fund profits, by contrast, are taxed at much lower capital-gains rates.

Annuities come in two basic flavors: fixed and variable. As recently as 2000, variable annuities, which move up and down with the markets, outsold fixed annuities nearly three-to-one. But sales of variable annuities have been hurt by the stock market's nosedive.

Many variable annuities carry substantial fees, as high as 4 percent annually. Over time, that can drain a hefty amount out of a portfolio. Other annuities have deceptive teaser rates for the first six months or a year. After that period, investors are stuck with sub-par returns.

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