* Investors are pushing annuity sales to record levels
* Demand coming when fixed annuity payouts are low
* New products and features are in the pipeline
By Linda Stern
WASHINGTON, Sept 20 Not too long ago, if you
mentioned the word "annuity" to investors, their eyes glazed
over. But now individual investors, panicked by stock market
selloffs that threaten their retirement dreams, have been doing
something they have never done before: asking for them.
Paradoxically, they are looking for these retirement
insurance products that come with guarantees at a time when
many annuity payouts are puny, thanks to ultra-low interest
"This year will indeed be a record-setting one for the
industry," said Cathy Weatherford, president of the Insured
Retirement Institute, an annuities trade group that is hyping
its annual meeting with a "Get Ready for Boom Time!" call to
Sales of annuities hit $60.4 billion in the second quarter
of 2011, up 10 percent from the second quarter of 2010, the
Savers have been investing in both variable annuities,
which allow investors to choose underlying investments and are
typically used to accumulate retirement savings, and fixed
annuities, which offer a guaranteed, preset
monthly payment for life and are typically bought during a
person's retirement years.
While there's no data on how many annuities are "sold"
because they are pushed by insurance agents and brokers,
there's anecdotal evidence of increasing demand.
In one month, New York Life [NYLIN.UL] exceeded its annual
sales goal for a new deferred fixed annuity it unveiled in
mid-July. "Retirees and those near retirement are searching for
ways to safeguard their nest eggs and increase their payouts.
This is fueling a growing hunger for guaranteed income," a
For years, annuities got a bad rap for high fees, confusing
choices and poor investment performance.
"For the most part, annuities have historically been
oversold," said Sheryl Garrett, a Kansas City fee-only
financial adviser. "Right now, they may be being overbought."
American investors now seem to care more about guarantees
and security than they do about wealth, according to a July
survey by SunAmerica Financial Group and demographic research
firm Age Wave. Some 65 percent of investors said they want
investments that are guaranteed not to lose value and 60
percent seek to protect their income from market loss.
But Garrett contends that many advisers are too quick to
meet consumer demand for security with annuities when there may
be better solutions.
LOW RATES, LOW RETURNS
The new demand for secure payouts is unsurprising, given
the rocky returns posted by stocks - the S&P 500 index is down
3.3 percent so far this year and has had several scary selloff
days this summer. There's also minuscule interest paid by bank
accounts and bonds. The benchmark 10-year U.S. Treasury is
yielding 1.94 percent, near a generational low.
While low interest rates are driving the hunt for income,
those same low rates also mean that immediate annuity payouts
are exceptionally low, too. Buy-high, sell-low consumer
investors may be racing to the right place at the wrong time.
"The resiliency of second quarter's fixed annuity sales is
remarkable, given that interest rates were below those of the
year-ago or prior quarters," said Beacon Research President and
CEO Jeremy Alexander. "Though rates have continued to decline,
there has been a general flight to safety that may make third
quarter another strong one for fixed annuities."
Those low rates can make a significant difference to
Because insurance companies back their annuity promises by
investing in bonds, low bond market rates translate into lower
annuity payouts by hundreds of dollars a month.
In an article titled "The dangers of buying an annuity when
interest rates are low," Thomas Cochrane, founder and publisher
of Annuity Digest, offers this example: Robert, a 65-year-old
man, buys a $100,000 annuity when 10-year Treasuries are
yielding 5.4 percent and receives a guaranteed monthly payout
for life of $835. If those Treasuries were yielding 3.4
percent, his monthly payout would be $708. And at recent yields
of 2.29 percent, that same $100,000 would only buy Robert a
monthly payment of $633.
Since immediate annuities are rarely indexed for inflation,
locking one in at a time of record low rates could hurt the
retiree who is counting on that payout to last for decades.
After 20 years of 3 percent inflation, Robert would still be
getting that same $633 a month, but it would only be buying him
as much as $350 in today's dollars.
The annuities industry is trying to meet investor concerns
by refining products. ING USA Annuity and Life Insurance
Company now allows investors to benchmark their annuities to
short-term interest rates, so they can take advantage of rising
rates in the future.
The New York Life plan is a deferred fixed annuity, so
savers can spread out their purchases over years, presumably
taking advantage of rising interest rates along the way.
Retirees who want to lock in immediate fixed annuities can
do that gradually, spreading out their purchases so they end up
buying several smaller annuities over years instead of buying
them all at once.
Consumers should also make sure they aren't paying too much
for the warm comfort they think they are getting from
annuities. "The monthly payouts of the best and worst deals
among financially secure insurers usually vary by about 20
percent. That's a 20 percent difference in your monthly income
every month of your life," said Bob Carlson, a financial
adviser and editor of Retirement Watch newsletter.
Some web sites that offer comparison shopping for annuities
include immediateannuities.com, fidelity.com and
incomeannuities.com. Fee-only financial advisers who
recommend annuities often steer clients to low cost versions
such as those offered by Vanguard and Jefferson National.
Retirement savers may want to wait, not just for interest
rates (and payouts) to rise, but for more of these new and
improved products to come on the scene. "Income products are
improving," said J. Mark Iwry, a senior Treasury Department
official tasked with helping to formulate Obama administration
retirement policy. "There is evidence of creativity and
innovation in the market," he told Reuters in a recent
Safety-seeking consumers can also take their concerns to a
financial planner who doesn't sell annuities for a more
objective opinion. Advisers who bill hourly, for example, don't
have any incentive to sell annuities - or to talk investors out
of them - as a financial planner who charges a percentage of
assets under management might.
A good planner can compare annuities and review a client's
entire financial picture to make sure that such an insurance
product is a good fit in the first place. Some of those
frightened investors may not need a change in strategy, just an
attitude adjustment and a hand to hold.
(Reporting by Linda Stern; Editing by Lauren Young, Beth
Gladstone and Walden Siew)