Retirement & Financial Planning Report

Variable annuities offer buyers the chance to choose among subaccounts, many of which resemble stock funds or bond funds. Your contract value will grow or shrink, depending on how these subaccounts perform. Yet you can defer paying income tax until money is withdrawn from the contract.

Many variable annuity subaccounts are managed by the same companies that run mutual funds. Before buying, check to see if you’re comfortable with the people who’ll be responsible for your investments. On the bright side, improper trading practices are unlikely to be found in variable annuities, due to higher fees and the lack of easy liquidity.

Some investors raise these concerns about including variable annuities in their retirement planning:

* Costs. It’s true that variable annuities have expenses so the ultimate investment return probably will be lower than, say, the return from a portfolio of mutual funds. If you’re considering a variable annuity, find out what the costs will be. Decide whether it’s worth paying that much for tax deferral and for the guarantees included in the contract.

* Illiquidity. Tax penalties and surrender charges may be in force while you are building the contract value. After the contract is annuitized, you may have scant access to the capital. Some insurers provide liquidity feature so you can get at your money, if needed. Ask about these provisions before buying.

* Fear factor. Many people are concerned that they will annuitize a contract in order to receive lifetime payments but die shortly thereafter. If that’s an issue, you can choose an annuity that will pay a bit less but will keep paying a surviving spouse, for example, or an annuity that will pay a beneficiary for a certain number of years if you die soon after annuitizing.