Using The Split Annuity To Deliver
More Tax-Free Income

Retired Americans today rely on three vanes of retirement to survive – Social Security, pensions, and personal investments. In the aftermath of September 11th, many retirees took a ride they’ll not soon forget and may never recover from. To make matters worse, historically low interest rates have reduced some senior’s incomes by as much as 90 percent. We call it the Income Dilemma. On one hand, most conservative investments don’t generate high enough returns to provide meaning income, while potentially higher-yielding investments subject seniors to principal risk.

Advisors trying to help their clients should consider the Split Annuity Concept. It is a sound approach to consider whenever you have clients looking to withdraw interest from CDs, money markets, or even annuities.

A split annuity is two contracts, consisting of an immediate annuity and a deferred annuity. The immediate annuity is structured to generate a dependable income stream for some period certain, typically between five and ten years. The deferred annuity is structured to guarantee a full return of principal once the immediate annuity has been depleted. But the real value in this concept is featured in the exclusion ratio of the immediate annuity, which provides tax-advantaged income during the payout period when non-qualified funds are used. As compared with simply withdrawing interest, that is 100% taxable, this will often generate between 25 and 35 percent more usable income for your clients.

Unfortunately, many advisors seem to overlook the split annuity concept and that’s unfortunate. Especially in times of low interest rates, a split annuity concept could dramatically enhance your client’s after-tax income without risking principal.

At Shore Benefits, we build split annuities with integrity by selecting the strongest immediate and deferred annuities from our portfolio of companies. And we package your split annuity concept using an illustration system that not only clarifies the concept, but compares it to withdrawing interest from taxable investments like CDs. And remember, our product philosophy means you can feel good about recommending the products we select.


Advisor Considerations

• Make sure you and your clients understand the tax consequences and penalties of liquidating an asset before transferring into a split annuity. Advising your clients to consult with their tax advisor may be appropriate.

• If considering a split annuity using qualified funds, remember that 100% of the income from the immediate annuity is taxable. For that reason, compare the income from the split annuity to the amount of interest that could be taken by using systematic interest withdrawals from a deferred annuity. Your client may be better off.

• If your client’s income is hovering near the Social Security taxation thresholds, be sure the taxable percentage from the immediate annuity does not trigger the Social Security tax.

• If using the split annuity concept to fund long-term care insurance premiums, consider utilizing deferred annuities with crisis waivers. Crisis waivers allow contracts to be liquidated without surrender charges if the policyholder is admitted to a long-term care facility. Some contracts allow for liquidation due to hospital confinement.

• With the advent of Guaranteed Monthly Income Benefit riders on variable annuities, advisors may want to explore using variable annuities as the deferred vehicle. Because of their strong guarantees, more money can be allocated to the immediate annuity…creating more income.

Shore Benefits Brokerage. PO Box 1. Allenhurst. NJ 07711
Toll Free: 800-777-1459 / Local: 732-531-8339 / Fax: 732-517-1079 / Cell: 732-233-958