What is an Annuity?
An annuity is a contract between an investor and an insurance company purchased by the investor through either a single payment or a series of payments. Annuities can be either immediate, meaning that income and return of principal begin to be paid immediately,
or deferred, whereby assets accumulate tax-free until withdrawals are made. Withdrawals are subject to federal income tax at ordinary income tax rates and may also be subject to state taxation. If money is withdrawn before the investor reaches the
age of 59 ½, it may be subject to a 10% penalty in addition to ordinary income taxes. Deferred annuities are best used for long-term goals such as planning for retirement. For most investors it is advantageous to make the maximum allowable
contributions to IRAs and 401(k) programs before investing in an annuity.
When you purchase a deferred annuity within a tax-qualified retirement plan such as an IRA or 401(k), you get no additional tax advantage from the annuity since earnings and income in such a plan are already tax-deferred. You should consider purchasing
an annuity within a tax-advantaged retirement plan only if it makes sense because of the annuity’s other features such as lifetime income payments and death benefit protection.
There are two types of deferred annuities, fixed and variable.
Fixed annuities guarantee an interest rate for a period of time, generally 1–10 years, and some contracts offer guaranteed minimum rates of return for the life of the contract. Fixed annuities are not subject to fluctuation in value as are variable annuities.
Both principal and interest earned are backed by the financial strength of the issuing insurance company.
Variable annuities are complex investment vehicles that combine features of both insurance contracts and mutual funds. An investor in a variable annuity can choose from a wide range of mutual fund like investment portfolios, usually referred to as subaccounts.
These subaccounts, with varying investment objectives and risk levels, can invest in stocks, bonds and money market instruments. Similar to mutual funds, the investment returns of these subaccounts fluctuate with market conditions. It is possible
to experience a loss on your investment in a variable annuity.
As noted above, earnings within a deferred annuity grow on a tax-deferred basis. Income taxes that would have been paid on capital gains, interest, or dividends, are deferred until they are withdrawn from the contract. The value of a variable annuity may
grow faster than a taxable investment with a similar rate of return, because money that would have been used to pay these taxes remains invested. It is important to realize, however, that when you withdraw money from a variable annuity, any portion
subject to tax will be taxed at ordinary income rates rather than the lower tax rates that are currently applicable to long-term capital gains and certain dividends. Therefore, the benefit of tax deferral may outweigh the costs of a variable annuity
only if you use the annuity for goals such as long term retirement planning.
Variable annuities offer many optional features that you may want to consider, such as minimum death benefit and minimum living benefits. These features are backed
by the financial strength of the issuing insurance company. They may be part of the contract or you may elect them at the time of purchase. Each optional feature that you choose typically carries a charge.
Please carefully read the contract and offering material, including the current prospectus, and consult with your Financial Advisor before investing.
Additional information about annuities is available at:
Securities and Exchange Commission
Understanding How Janney and Your Financial Advisor are Compensated
Janney and its Financial Advisors receive compensation from the insurance company when you invest in annuities. The amount of compensation varies based on the type of annuity, the issuing insurance company and the amount invested. You should discuss with
your Financial Advisor the form of compensation she or he receives. The amount of compensation, also known as a commission, is typically a percentage of the amount invested. In the case of variable annuities, Janney and its Financial Advisors may
receive ongoing payments from insurance companies which are known as “trails.”
Through our relationship with insurance companies, Janney and our Financial Advisors may also receive other forms of compensation that do not directly affect the amounts our clients are charged for annuity transactions,
including revenue sharing arrangements and promotional assistance. These forms of additional compensation are generally referenced but may not be discussed in detail by an annuity’s prospectus or statement of additional information. These forms
of compensation are meant to cover a variety of initiatives and expenses incurred by Janney, including expenses associated with marketing annuities to investors, educating Financial Advisors, and performing administrative services for clients. Since
Janney and our Financial Advisors do not receive these forms of additional compensation from every insurance company with which we do business, we have a greater financial incentive to promote those insurance companies that do offer additional compensation.
However, our Financial Advisors frequently recommend, and you are free to choose, investments in fund families that do not offer additional compensation.
Revenue Sharing Arrangements
Janney incurs a variety of expenses in connection with educating its Financial Advisors and clients regarding annuity investments, and providing marketing and sales support to insurance companies. Insurance companies may enter into revenue sharing arrangements
with Janney in connection with the distribution of their annuities through our Financial Advisors. Some insurance companies may also enter into revenue sharing arrangements to offset the costs associated with Janney’s educational and marketing
initiatives. In exchange for entering into revenue sharing arrangements, Janney may provide insurance companies opportunities to (i) participate in Janney’s seminars with Financial Advisors and clients; (ii) distribute information regarding
annuities to Janney’s Financial Advisors; (iii) review Janney sales data relating to certain Financial Advisors and annuities; and (iv) access Financial Advisors in Janney’s branches.
Under a revenue sharing arrangement, an insurance company will agree to pay Janney a portion of the revenue generated from the sale and management of annuities in clients’ accounts. Where Janney has entered into a sales-based revenue sharing arrangement
with a particular insurance company, Janney typically requests a fee equivalent to 0.20% of the participating insurance company’s gross sales made through Janney during a given timeframe. Where Janney has entered into an asset-based
revenue sharing arrangement with a particular insurance company, Janney typically requests a fee equivalent to 0.10% per year of the assets managed by the participating insurance company for Janney’s clients. Janney's Financial Advisors do not directly
share in the fees received by Janney pursuant to its revenue sharing arrangements.
Janney attempts to impose a standard fee schedule upon all insurance companies whose annuities are sold through Janney and requests a minimum contribution of forty thousand dollars ($40,000). Certain insurance companies, however, may not agree to comply
with Janney’s standard fee schedule or minimum contribution amounts. Other insurance companies who distribute annuities through Janney may elect not to participate in a revenue sharing arrangement with Janney.
Janney has entered revenue sharing agreements with the following insurance companies with respect to certain annuity policies offered to clients:
Jackson National Life
The revenue share payments vary by insurance company and are generally based on an annual percentage of new or gross sales ranging from 0.15% (15 bps) to 0.20% (20 bps).
The revenue share payments to Janney are from the insurance company or its affiliate and are in addition to commissions received. During calendar year 2016, Janney received a total of $326,433 in revenue sharing payments from insurance companies. No revenue
sharing payments are received with respect to group annuities held by retirement plans maintained on the annuity provider’s recordkeeping platform.
Promotional and Educational Assistance
Janney, our Financial Advisors and our clients may, from time to time, receive from insurance companies and their marketing representatives (known as wholesalers) occasional nominal gifts, meals, tickets to sporting events or other comparable entertainment,
or payment or reimbursement in connection with conferences or meetings held for the purpose of training or educating clients, prospective clients or Financial Advisors. From time to time, our Financial Advisors may also be invited to attend conferences
or meetings sponsored by insurance companies. These activities are also intended to result in the promotion of the insurance products marketed by the wholesalers.
Fees and charges vary with different types of variable annuity contracts.
Standard Variable Annuities
Most variable annuity contracts are offered with no initial sales charge, but cancellation of the contract within the first several years following purchase may trigger a withdrawal charge, known as a surrender charge. Usually this charge decreases and
disappears over a period of time. For example, a surrender charge may be 7% if surrendered in the first year, 6% in the second year and so on, until after seven years there is no surrender charge. Some annuity contracts impose surrender charges only
during the initial surrender charge period that begins after the contract is purchased, while others begin a new surrender charge period that applies to each subsequent premium or investment made.
Surrender charges underscore the necessity of considering annuities as long-term investments.
A number of insurers have begun to offer other types of charge structures to meet differing investor needs.
L Share Variable Annuities
L Share variable annuities have shorter surrender charge periods than standard variable annuity contracts, typically 3–4 years. L share contracts generally carry higher internal expenses than standard variable annuity contracts, which will reduce your
C Share Variable Annuities
C Share annuities have no surrender charges although tax penalties may apply to withdrawals before age 59½. C share contracts generally carry higher internal expenses than standard variable annuity contracts and L shares, which will reduce your
Bonus Credit Feature
Some insurance companies offer structures which credit additional dollars to your contract based on a percentage of money invested. Credits can range from 2% to 6% of the initial investment.
The issuing insurance company can offset the cost of the bonus credit feature by structuring a higher surrender charge with a longer surrender charge period, charging higher internal expenses compared to other contract structures, which will reduce your
return, or paying a lower commission to the broker-dealer.
Making an Appropriate Choice
Your Janney Financial Advisor can further explain the various contract structures to assist you in making an appropriate choice to match your investment time horizon and investment objectives.
Not all insurance company policies are the same; therefore, it is essential that you carefully read the variable annuity prospectus which outlines specific information concerning fees and expenses before investing.
Fees and Charges Associated with Annuities
Fixed Annuity Fees and Charges
When you invest in a fixed annuity, your money is placed in the general account of the insurance company. When setting the rate of return credited to the annuity contract, the company considers prevailing market rates and also the costs of issuing and
maintaining the annuity contracts. In addition to the surrender charges discussed below, some contracts may charge an annual maintenance fee, which can range from $25 to $30.
Variable Annuity Fees and Charges
In addition to the surrender charges discussed below, variable annuities have other expenses you should be aware of, as these expenses will reduce your return and, therefore, the value of your account.
- Mortality and Expense Risk Fee (M & E) - typically 1.25% to 1.60% annually. This charge is equal to a percentage of your account value and can be used by the insurance company to offset the costs of distributing the variable annuity, such as commission
paid to your Financial Advisor. It is also used to compensate the insurance company for certain risks that it assumes under the variable annuity contract.
- Administrative Fees - a flat fee (perhaps $30) or a percentage of the account value (perhaps 0.5%.) The insurer may deduct this charge to cover administrative expenses such as recordkeeping. The flat dollar charge may be waived, typically on accounts
- Subaccount Expenses - typically 0.5% to 1.5% annually. These fees and expenses, charged by the underlying investment managers in the variable annuity, are similar to the fees and expenses charged by mutual funds. These expenses include annual operating
expenses such as management fees, distribution fees (referred to as 12b-1 fees) and other expenses.
- Other Fees and Charges - Certain features offered in variable annuities such as additional death benefits, living benefits and bonus credits often carry additional charges or lead to a higher Mortality and Expense Risk Fee. In addition, there can
be a charge for transferring from one investment option in your annuity contract to another. The costs associated with variable annuities are generally higher than costs of mutual funds.
If you withdraw money from or surrender your contract within a certain period of time after investing, usually three to nine years, the insurance company may assess a surrender charge. Usually this charge decreases and over time disappears
altogether. For example, a surrender charge may be 7% if surrendered in the first year, 6% in the second year, and so on, until after seven years there is no surrender charge. Some annuity contracts impose surrender charges based on the initial purchase,
while others apply a new surrender charge period that applies to each subsequent premium or investment made.
Typically, contracts allow you to withdraw part of your account value each year without a surrender charge. This amount may be equivalent to interest earned or a percentage of contract value up to 15%.
A detailed description of the charges contained in a variable annuity can be found in the prospectus.
Additional information about annuities is available at:
Securities and Exchange Commission