A split annuity is a wealth management vehicle that is essentially two annuities in one. The idea is to give a person the immediate stream of income that an immediate plan can provide but also enable some of the wealth growth potential of a deferred policy.
Like a lot of the financial products on the market these days a split annuity is a hybrid vehicle designed to fit the needs of people who aren’t served by normal investments. Not surprisingly, there are only a few people whom these plans might make sense for.
An example of such a person would be someone who is getting ready to retire but hasn’t done much investing for retirement. If this individual had a lot of cash available he could buy a split annuity that would provide him with a retirement income and help him should a portion of his wealth from taxes.
Advantages to Split Annuities
Split annuities were designed for persons with a lot of cash who can’t take advantage of normal retirement planning options. Another example of such an individual would be somebody at or nearing retirement that has maxed out his retirement accounts. Such a person could shield additional income from taxation using a split plan.
The major advantage to this kind of investment is that it can provide a stream of income and growth potential. Its beneficiary would get a monthly check to payment to help cover expenses and the chance to enlarge his or her nest egg. Another advantage is that a person would not have to spend a lot of time and effort managing money.
A person who wanted to take a trip around the world or go off and write that Great American Novel at age 65 could be ensured of a regular payment to augment Social Security. This would be available right away to help somebody pay for that condo or trip of a lifetime.
The funds in the second or deferred annuity would be set aside to grow for around ten years or so. This could make more money available in the future when a person might need funds for long term care or medical expenses.
Limitations to Split Annuities
A split annuity is a very specialized product designed for people in a particular situation. It is not designed for the average investor or the average person planning for retirement. There are other annuity and retirement products that better meet the average person’s needs.
A person who purchases this kind of plan should have need of the bulk of the cash used for a long period of time. Another example of somebody who might buy this plan would be someone at 65 who planned to work part time for a few years after leaving a full time job. This person might want some additional income to help pay the bills and would like the chance to save additional funds for full retirement.
Something to remember is that the law requires a person to start taking funds out of most retirement accounts at age 70. A split annuity is one of the few vehicles that would allow a 70 year old who is still working to save for retirement and still get a regular payment.
Persons who want to keep working or running a business through their golden years could benefit from equity indexed annuities. Such a plan could allow them to keep saving for retirement and to get some additional income. Since the funds kept in such a plan are tax deferred there are tax benefits.
Individuals who are over 59½ years old will be assessed income tax in their bracket on any funds taken out of an annuity. Therefore payments from such a vehicle can increase a person or a family’s tax burden. A potential investor should definitely talk to a tax professional before investing in a split annuity.