Q. My grandfather bought an annuity, and I think it was a mistake from a pushy salesperson at his bank. The money used to be in CDs. My grandfather isn’t really good with money and he wants to know what he can do. He didn’t want to go back to the bank to ask.
A. Like every investment, annuities have their good points and their bad points.
Annuities can provide guaranteed lifetime income, but are not suitable for every investor, said Dead Shah, a certified financial planner with Stonegate Wealth Management in Oakland.
“Annuity salesmen receive a large commission and are notorious for selling their product regardless of whether or not it is appropriate for the client,” Shah said. “Annuities are often sold, not bought.”
Your grandfather has options, but none should be taken in haste because of the fees that may be involved.
If your grandfather was recently sold this annuity, he may be able to get out by exercising his “free look” period, said Brian Power, a certified financial planner with Gateway Advisory in Westfield.
“This is a kick-the-tires grace period in which you can terminate the policy and get your money back without paying a surrender charge,” Power said. “All annuity contracts must provide a minimum 10-day free-look period in New Jersey.”
Depending on the policy, the one your grandfather purchased could have a free-look period that’s as long as 30 days, Power said.
If your grandfather’s time is up, there may be a large penalty to get his money back out, Power said. Most annuities offer a surrender free withdrawal option, available in each contract year.
“These withdrawals can be five, 10 or even up to 20 percent of the initial investment that you can take out, penalty free, every contract year,” he said.
If your grandfather bought the annuity inside an IRA and he is at the age of required minimum distributions (RMDs) from his IRA (age 70 ½ ), he can also avoid the penalty by using his annuity IRA to take his minimum distributions, Power said. The amount withdrawn to fulfill his RMD will not be subject to the penalty, he said.
But because annuities often have very high internal charges, separate from the surrender charges, your grandfather may wish to get out completely. Before he does, he needs to carefully read all the fine print to make sure all fees are known.
“Your grandfather could liquidate or annuitize his annuity, but you should review the annuity contract very carefully to understand restrictions, fees, surrender charges and other contract restrictions,” Shah said. “You may want to consult a fee-only investment advisor, as they are not salesmen and can give you an honest answer.”
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