Allianz Life Insurance Co. of North America is launching an indexed annuity geared toward clients 70½ and older who don’t need the money that the government requires they withdraw each year from retirement accounts in the form of required minimum distributions.
When holders of retirement accounts hit 70½, RMDs kick in, mandating they withdraw and pay tax on a percentage of an individual retirement account or 401(k) balance.
If Allianz annuity owners don’t need an RMD for living expenses, and would rather keep their assets invested, Allianz’s product automatically rolls the RMD payment into a second annuity and withholds the associated tax. As an added incentive, the company pays a 25% bonus on funds in the second annuity.
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“I’ve never heard of anyone else doing this,” said Sheryl Moore, head of consulting firm Moore Market Intelligence. “The No. 1 complaint I hear from annuity purchasers is, ‘I don’t want my RMD; why do I have to take it if I don’t want it?’”
These sorts of products could ultimately be a way for insurers to combat the effects of the so-called gray wave in the U.S., the massive flow of baby boomers into retirement. About 10,000 baby boomers turn 65 every day.
The first boomers turned 70½ in 2016. The current number of 50- to 69-year-olds taking RMDs is projected to increase by more than 27 million individuals over the next two decades, according to a paper by the Bank of New York Mellon Corp.
That poses a significant problem for financial institutions, given the scope of asset outflows heralded by this demographic shift.
BNY Mellon projects that up to $10 trillion in assets will be subject to mandatory withdrawals by 2035. That’s nearly a third of the $28.2 trillion held in all retirement accounts (IRAs, defined-contribution and pension plans, and annuities), according to the Investment Company Institute.
The firms that solve the problem by creating “investor-friendly solutions may win the battle of asset retention,” according to the BNY Mellon report, The Impending Convergence of Baby Boomers and Required Minimum Distributions.
“We’re still at the front end of the boomer wave,” said Matt Gray, senior vice president of product innovation at Allianz Life, which sold the most indexed annuities in 2018. “I think you’ll see more of this type of solution, and more from us as well.”
The new Allianz product, Legacy By Design, is actually two separate annuity contracts — the initial tax-qualified indexed annuity and a second, nonqualified indexed annuity, which receives the RMD rollover, net of taxes. Purchasers only need to fill out one application, and can elect Allianz to automatically withhold RMD taxes or transfer the tax for the customer to pay directly. The company pays a 25% bonus in the form of a death benefit for heirs.
For example, if an annuity owner must take $12,000 from an indexed annuity for an RMD and $2,000 is withheld for taxes, the remaining $10,000 would go into the nonqualified annuity, plus a $2,500 bonus.
The death benefit for heirs would theoretically be the sum of remaining assets in the initial qualified annuity, the nonqualified annuity and any bonus payments, Mr. Gray said.
The product design mirrors a concept employed for several years to fund life insurance contracts, whereby a customer buys an income annuity and the income payments fund life-insurance premiums, Ms. Moore said. It’s meant to circumvent rules around the taxability of life-insurance investments.
There are other options to mitigate the effect of RMDs. For example, rules around qualified charitable distributions allow retirees to make direct transfers of up to $100,000 annually from an IRA to a charity using RMD payments, eliminating that income from a retiree’s tax return.
Retirees can also spend up to $125,000 to buy a QLAC, or qualified longevity annuity contract. Income from these annuities doesn’t kick in until well after age 70½, and retirees exclude these assets from RMD calculations.
(More: Guaranteed income tops boomers’ retirement wish list)
