Toxic Annuities
- A variable annuity becomes toxic when the net return of the annuity is less than the rate of return on a fixed interest annuity. A fixed annuity, in a sense, provides the benchmark for annuity performance. This is because a fixed annuity guarantees the rate of return inside the contract. If a variable annuity returns less than a fixed rate annuity, you would have been better off buying a fixed annuity.
- The significance of a toxic annuity is that the toxic annuity may negatively impact your future retirement. This is especially true if your annuity is losing money. Since the mutual funds inside of the variable annuity are not guaranteed, your returns will naturally fluctuate. Note that your annuity may not become toxic just because the pure returns of the mutual funds are lower than the rate of return on a fixed annuity. Variable annuities charge mutual fund fees. The annuity itself may also charge a fee on the contract. If the rate of return less all fees is less than the rate of return in a fixed annuity, then the annuity would be a toxic annuity.
- The disadvantage of a toxic annuity is that you are either consistently losing money or you are making less than the rate of return on a fixed annuity. You'll have less money than you would otherwise have on a guaranteed basis. because of this, your income will be lower. You may not be able to accomplish your financial goals in retirement.
- If you are in a toxic annuity, you might be able to move your money into another type of annuity. If you are outside of the surrender period for the contract, you can transfer your annuity into another variable annuity or into a fixed annuity policy. The surrender period is listed on your policy contract. It is the amount of time that you must hold the contract expressed in years. There is normally a charge associated with the annuity's surrender period. If you are outside of the surrender period, you'll incur no fees for moving your money.
