1. Go back to school or pay for childrens’ college expenses
2. Go on vacation
3. Pay off high interest credit card debt
4. Pay off home equity lines
5. Get cash for a downpayment on a new home
6. Buy a new car

If you have a structured settlement or annuity and could get all of your cash now, what would you do with it?

• J.G. Wentworth
• Seneca One
• PPI Cash
• American Settlement Funds
• Prosperity Partners

As I said, I will update this list as I come upon more annuity buyers. If you are selling your structured settlement annuity, I would suggest contacting as many of these buyers as possible to make sure you get as much cash for your annuity payments as possible!

Managing the money that is paid to you upon retirement requires careful planning and an honest, realistic assessment of your current situation and whether you are able to maintain your standard of living given what you have put away.

Upon retirement, the Pension Funds Act obliges you to use two thirds of the money paid out from your pension to buy an annuity; hence the name compulsory purchase annuity (the other type is a voluntary annuity, where you can choose to invest a lump sum of money – the other being third paid out to you). An annuity is essentially a pension too – you take the amount you receive upon retirement and purchase an income, which can be paid out on a monthly, quarterly, bi-annual or annual basis.

The type of compulsory annuity that one chooses will depend on interest rates and the level of risk that one is able and willing to take.

The main choices are between:

A fixed life (conventional) annuity: this annuity provides a fixed income for a guaranteed period. The income paid on this annuity depends on the rate offered by the life assurer you choose. This rate, in turn, is usually a bit below the prime rate of interest. You can opt to build “inflation-fighter increases” into your life annuity: although this will lower the income received, pensioners will be protected against inflationary price increases. You could opt for a single life fixed annuity, which dies with you (that is, it isn’t paid out to a beneficiary) or a joint life fixed annuity, which provides income for a guaranteed period and thereafter as long as your beneficiary is still alive. You could choose to have the amount paid out to your beneficiary as a lump sum.

A living annuity: the income paid by this annuity is linked to the performance of underlying assets, so when they perform well, you get more, but when they don’t, one can be caught out badly. The pensioner would receive variable income, depending on the performance of those assets, and has a choice of drawing an annual income of between 5 and 20%.

This can be hugely problematic, however, as people may draw more than what the annuity returned in the year; this would eat into the capital, and if you live a long life, you may be caught with no money.

Living annuities need constant, careful monitoring, and one needs advice on the actual investments underlying the annuity, or else the invested capital could be lost.

Also, one has to be disciplined and take an income relative to the returns on the portfolio.

For example, if the return on the living annuity is 10% and you’re drawing 12% per annum, you would be eating into the capital initially invested and could land up with nothing.

Life assurers calculate the rates of return on life (conventional) annuities on a weekly basis, with the rates based on how South African interest rates are performing; the higher the interest rates, the higher the pay out from the annuity would be.

The big four assurers change their rates slightly on a weekly basis, and you can obtain this data from the finance pages of the weekend papers.

One should also realise that the time of the month you choose to have the money paid out to you makes a difference. If you choose to be paid in arrears, you will be paid out a little more money because the amount will have accrued interest.

However, on any other term except monthly, it makes sense to be paid in advance, as one can’t afford to wait for the money.

Planning for what to do with your pension money is a highly individualised process, and one that should start at least a year before you retire.

Married people are far more likely to buy an annuity that provides an income for their spouse when they die if they get independent advice, according to new figures from pension companies.
Shoe shop
Shop around: make sure your annuity fits snugly with your needs

The revelation comes just days after Age Concern called for radical changes to the way annuities are sold because “selfish” husbands leave their wives hard up when they die by buying single-life annuities.

Age Concern points to figures from Standard Life that showed three quarters of all the pension annuities it is paying to married people, most of whom are men, provide no income for a widow. The charity is calling for a system that demands written consent from a married partner when an individual chooses a retirement income which does not have a widow or widower’s benefit.

But new data from annuity specialist Prudential shows that 45 per cent of its customers take a pension income with no widow or widower benefit when they do not get advice, but this figure rises to 55 per cent among those who shop around for the best rate with the help of an independent financial adviser. Some 74 per cent of all 60 to 65-year olds, the typical age when a pension is converted to an annuity, are married.

Pensions experts say the problem of husbands leaving their wives in the lurch is being exacerbated by poor information from pension companies - and a confusing system.

Almost 60 per cent of people converting their pension pot into an income stay with their existing pension provider rather than shop around for the best rate. By doing so, they could be missing out on up to 30 per cent more income for life and risk being pushed into deals that are not suitable for them or their spouses, say annuity experts.

For example, Audrey Dodson, a 67-year-old Sunday Telegraph reader, claims a Prudential agent made no mention of an option with a widow’s benefit when talking to her husband about buying an annuity, even though she was sitting in the room. “At no point did the agent ever mention a smaller pension paying out on the second death,” she says. “In many cases it is the insurance companies not explaining the issues properly, so don’t blame selfish men.”

The majority of pensions with no spouse benefit were taken out several decades ago. Indeed, Age Concern accepts that the situation is better than it was, but says a problem remains.

The Association of British Insurers says the decision on whether to buy a single life or joint life annuity is not always clear cut and it is an individual choice.

Helen McCarthy, the head of pensions and savings development, says people tend to choose the annuity that pays most in the early years. “People tend to go for the highest starting income so they can enjoy it while they are more active, and for couple that will always be one with no spouse benefit. It is an individual choice and not for us to tell people what they should do. And women increasingly have their own pension, so there are cases where each partner takes out a single life annuity of their own and they are both covered.”

Each couple is in a different situation and what is right for some will not be right for others says Billy Burrows, director of William Burrows Annuities. “In some cases you will find the wife has an inheritance from her parents or her own property somewhere else, so she is well provided for,” he says.

I’m a big fan of annuities, both fixed and variable. They combine many of the attributes that retirement conscious investor’s desire: safety of principle, asset growth, income guarantees and tax deferral.

Many of the newer variable annuities (VA) are equipped with some pretty nifty additional features that can insure against market losses, safeguard income from market fluctuations and provide estate-planning benefits.

Over the past few years many annuity holders have switched from their old annuity to one of the newer types. Perhaps it’s a good idea to consider upgrading your annuity. It’s also probably a good idea to look seriously at moving your long-term investment and retirement dollars into an annuity, because of their safety features, which mutual funds, stocks and bonds don’t have.

A word of caution, if you’re considering swapping your existing variable annuity for a new one, make sure you’re doing it for the right reasons.

Make sure you have sound reasons for exchanging an existing fixed or variable annuity for a new one. As I mentioned above, new annuities offer improved features the older ones don’t. A newer annuity may offer more investment options or may lower fees than your current annuity. You may want to move into an annuity with a higher rated company.

Unlike many other investments such as stocks, bonds and mutual funds, you can exchange one annuity for another by using a 1035 tax-free exchange, without causing tax liability. But should you make the exchange? Financial experts seem to be split on this issue.

The first thing to consider is will you pay any penalties or surrender charges to exchange your annuity. If the answer is yes, find out what they are. If the cost is small, the exchange is more easily justified. However, some charges could be thousands of dollars, making the exchange prohibitive.

Second, many investors have exchanged because of poor performance. On the surface this appears to be a valid reason. However, during periods of market decline, most funds will fall in value, regardless of which annuity they’re in. Therefore, moving into another annuity to “chase returns” is probably a bad idea. You may consider researching other investment options within your existing annuity.

Another factor to consider is whether it’s worth the exchange just to get the features and safe guards. Do you really need them? Do they make sense for your needs? Will they help you achieve your financial goals?

Another issue to consider is the death benefit on your existing annuity. You may lose a chunk of your death benefits if the value of your annuity is less than the guaranteed death benefit.

A 1035 exchange into a new annuity may be a great way to improve your financial situation. But every situation is unique and you need to consider all the issues to determine whether it is economically worth your while. You might be better off to keep your existing annuity and buying a new VA with new money if it has the benefits you want.

If you own an annuity and wonder if there’s something better out there, your best bet is to consult with a financial advisor to determine if switching will be in your best interest.

If two insurance trade groups have their way, all investors will discuss that question with their insurance agents before buying.

The American Council of Life Insurers and the Insurance Marketplace Standards Assn. recently announced a push to extend “suitability” protections to every consumer. These protections require insurance salespeople to consider an investor’s time horizon, assets and goals before recommending an annuity.

A handful of states, including California, have instituted these protections, but only for investors age 65 and older. This is the first time that insurance agents would be required to discuss the issue of suitability with buyers under 65.

But there’s a catch: Neither insurance organization — nor the National Assn. of Insurance Commissioners, which has been pressing for laws on disclosure and annuity sales practices since 2003 — has any authority to make it happen. In the last three years, only 11 states have moved to protect seniors from abusive annuity sales. And just eight states require detailed disclosures of the pros and cons of an annuity.

Even though financial experts say that tax-deferred annuities are rarely a suitable investment for anyone, the products are gaining popularity. In 2004, the last year for which statistics are available, $224 billion in tax-deferred annuities were sold, more than twice the sales from 10 years earlier.

Tax-deferred annuities are designed to allow people to save money for retirement on a tax-deferred basis. Money put into an annuity is contributed with after-tax dollars, and the income it earns is tax free until the money is withdrawn.

The big drawback: the costs.

First, the annuity obtains its favored tax status by including an insurance element, which promises the buyer a death benefit guarantee. But that benefit comes at a cost: The typical annuity includes so-called mortality and expense charges, which can add up to 0.5% to 1.5% annually.

Another cost is the big tax bite. Although investment income isn’t taxed as it accumulates, all that income is taxable when it is withdrawn at retirement. Moreover, it’s taxed at ordinary income tax rates, which can be as high as 35%, not capital gains rates, which currently top out at 15%.

If money is taken out before age 59 1/2 , the withdrawal also can be subject to penalties.

The combination of mortality and expense charges and the higher tax rate make annuities a high-cost investment.

Whether equity-indexed annuities, EIAs for short, are a godsend or quicksand does, in fact, depend on whom one speaks to. The attraction is obvious: EIAs, offered through insurance companies, are structured to incorporate market-driven movement with the guaranteed return of an annuity. That might give EIAs an edge over standard fixed annuities and a bit more stability than variable-rate annuities, but they’re not quite that simple.

Why? EIAs’ rates are determined based on the performance of the stock market index, such as the S&P 500 that’s used by many EIA issuers, to which the annuity is tied. Some issuers measure the gain each month, while others use a year-to-year method.

That means, for example, that an EIA might guarantee 3 percent annual return and add on a percentage, typically around 85 percent, of the index’s annual increase. Most cap the potential annual gain at somewhere between 7 percent and 11 percent but will only guarantee up to 90 percent of principal — in addition to the annual guaranteed return, usually 3 percent. If the index jumps substantially over the year — 20 percent or more — the returns would beat the heck out of a money market. But what’s confusing is that companies use a so-called “participation rate” to determine how much of the gain the investor receives. If it’s 85 percent, and the index rises 5 percent in a given year, the investor’s account is credited with a 4.25 percent return.

That sounds pretty good on the surface. But these investments can be complex. For example, the EIA company calculates gains in one of several ways, ranging from the market price on the day the EIA matures to an average of the gains for each year of the contract period. EIAs also can be costly from the standpoint of large surrender fees and potential penalties for early bailout. The penalties often can last 10 years. This could be financially painful if the investor should need some of or all of their money in less than a decade.

The tax picture is also a consideration. EIA withdrawals are taxed as income, while gains from an S&P index fund would be subject to the usually lower capital gains rates. On the other end of the spectrum, while EIAs protect against some of the market’s downside risk, dividends are excluded, which means investors could earn less than they might have had they invested directly in the market.

In addition, it’s important to remember that guaranteed returns may be structured differently from one EIA to another, and most are contingent upon staying in the annuity for the full term. One company might guarantee 3 percent on total monies in the policy, while another may guarantee the 3 percent on only 80 percent to 90 percent of the principal the investor put into the product. The difference between the two figures could be substantial.

The final potential downside is that EIAs, although based on stock market instruments, are not regulated by either the Securities and Exchange Commission or the National Association of Securities Dealers. Because they’re insurance contracts, they fall under state regulation. In addition, EIAs can be sold by individuals who don’t have a securities license.

In what I would think would be an obvious sales practice, a major insurance industry group has agreed to support regulation by the National Association of Insurance Commissioners (NAIC) to make sure annuities sold to all consumers are appropriate for their financial objectives.

Inappropriate annuity sales to senior citizens prompted the NAIC to recommend that states adopt regulations specific to that group of consumers in order to curtail deceptive sales practices. The Senior Protection in Annuity Transactions model regulation requires that annuity-purchase recommendations to consumers aged 65 and older be based on information about their financial situation, such as their investment objectives or tax status.

The regulation came about because many seniors didn’t understand or weren’t adequately informed of the details in their annuity contracts.

But it’s not just senior citizens who are confused about annuities. NAIC decided it wanted the model regulation for seniors extended to cover annuity sales to all consumers. The industry initially balked at the expansion.

But recently the ACLI issued a statement that it would urge the states in 2006 to extend to all consumers the protections contained in the model regulation.

Here are just a few of the questions the NAIC says people should ask before buying an annuity:

Is my annuity fixed or variable? A fixed annuity earns a guaranteed rate of interest on the money you give the insurance company for a specific time period. Once the guarantee period is over, a new interest rate is set for the next period. Variable annuities typically offer a range of investment options. The return on a variable annuity varies depending on the underlying investment.

If buying a fixed annuity, what is the initial interest rate paid and how long is it guaranteed?

What are the fees and charges? Specifically ask what are the surrender charges or penalties if you want to end your annuity contract early and take out all of your money.

Does this annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?

What annuity income payment options do I have?

Is this annuity appropriate if I haven’t taken advantage of other tax-deferred retirement accounts such as a 401(k)?

Hopefully the NAIC reforms will help prevent many inappropriate annuity sales.