Preserve Tax Deferral Benefits for Annuities

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In today’s challenging economic times a growing number of Americans rely on annuities to help provide security for their retirement. Indeed there are more than 35 million annuity contracts in force representing over $2.4 trillion in annuities. The annuity market is comprised of largely middle-class people with the average annuity being $60,000. In 2010, life insurance companies paid $65 billion in annuity benefit payments providing crucial retirement security to contract holders.

Annuities are insurance contracts between consumers and insurance companies. There are different types of annuities including fixed annuities, which credit interest based on a fixed interest rate, indexed annuities, which credit interest based on the performance of an external market index, and variable annuities, which credit gains and losses based on the value of a separate account. Annuities can be set-up as immediate annuities, which begin making income payments within a year of purchase, or as deferred annuities, which will make income payments beginning at a future date selected by the owner. In addition to nonqualified annuities, annuities may also be issued as IRA’s and under other qualified retirement plans. Annuities are an essential part of a sound financial plan for millions of Americans because they provide financial security for families and individuals during volatile economic periods, and they can be a vital risk management tool to protect retirees against the possibility of outliving their financial resources. Annuities allow wealth accumulation, protection and income distribution options to meet consumers’ financial objectives. They are unique among financial products in that they are the only product in the financial marketplace that can provide American retirees with a guaranteed lifetime income stream.

Under current tax law, the inside earnings build-up in an annuity are taxed at distribution as ordinary income. Additionally, for higher income earners the Dodd Frank Act increased taxes on distribution by 3.8%. Earnings withdrawn before age 50 1Ž2 are subject to a 10% penalty unless an exception applies. Therefore, earnings on an annuity are tax deferred, not tax free.

As the Administration and Congress look to reduce spending and increase revenue to tackle America’s
growing debt and deficit issues, comprehensive tax reform is at the forefront of all policy debate, and
overhaul of the entire tax code is under consideration. Policymakers must recognize from the outset that if they changed the current tax treatment of annuities the negative consequences on retirement savings for millions of Americans would be devastating. Numerous studies have shown that huge retirement savings gaps and longevity risks exist for millions of average Americans. The removal of the favorable tax treatment of annuities would exacerbate these problems. The preservation of the tax benefits of annuities are a vital tool to help ensure financial security for retirees.

Indeed a recent report from the President’s Council of Economic Advisors points out the benefits of
annuities, particularly deferred annuities, as a products that can help America workers “mitigate some of the risk” they face in retirement, especially the “risk of outliving assets.” This report encourages the expanded use of annuities. Quite significantly, the report recognizes and accepts that deferred annuities are “utilized due to the tax-advantages.” Additionally, a pending Treasury/IRS proposed rule seeks to facilitate greater use of certain “qualified longevity annuities,” which provide income to retirees of advanced age who otherwise often would outlive their assets.

On behalf of tens of millions of middle-class American retirees, as well as the thousands of insurance
professionals in every state who provide them with fixed annuities and other annuity products, NAFA
strongly urges Congress to preserve the current tax treatment of annuities.



NAFA, the National Association for Fixed Annuities, is a national trade association exclusively dedicated to promoting the awareness and understanding of fixed annuities. NAFA is the only association whose sole purpose is advocating for the fixed annuity product.

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