Fidelity Personal Retirement Annuity – Fidelity’s Deferred Variable Annuity

I’ve seen investment advisors badmouthing annuities, but according to Jim Schlagheck, deferred variable annuities are worth looking into for several reasons. “Annuities give you the advantage of deferring taxes on your investment income and gains until the annuity income is paid out some time later. So annuities function somewhat like IRA or 401(k) accounts. They give you important tax advantages with one major difference – while there are limits on how much you can put into an IRA or 401(k) each year, there are no limits on the amount of money you can lodge in an annuity. With a deferred variable annuity, you are able to invest some entry amount and then make additional monthly or quarterly payments. You are also able to invest your annuity money in a series of different mutual funds. So if you select high-quality funds and prudently diversify your annuity portfolio, you can achieve significant gains with better compounding because of the tax deferral.” It must also be noted that upon death of the owner, the annuity is not considered part of his estate and the cash value is paid directly to the beneficiaries. This type of annuity is one more way to put money in a tax-sheltered account for the purpose of generating retirement income, and arranging for assets to be transferred directly to beneficiaries upon your death, bypassing estate taxes.

There is no question that Fidelity is the lowest-cost reputable deferred variable annuity provider. Their .25% annual charge compares to an industry average of 1.40%. However, Fidelity’s plan does not have a minimum guaranteed death benefit, whereas the industry average annuity may; and of course, any Fidelity mutual funds in which you invest your annuity will have their own expenses and fees.

Fidelity Personal Retirement Annuity, Fidelity’s deferred variable annuity, has a minimum initial purchase of $5000 and there is no surrender charge. You can allocate your investment among a great number of Fidelity funds as you wish, and you are permitted to change investments occasionally, but there are rules which punish “excessive trading”. The plan offers flexible withdrawal options, including an income annuity option to create your own pension, systematic withdrawals, partial withdrawals, or a lump-sum withdrawal.  The Fidelity representatives are friendly and knowledgeable.

But I learned that my state would impose a 2% annuity premium tax on money I contribute to the annuity. I almost abandoned the plan, but after crunching the numbers it does look like it’s worth it. The state is trying to discourage people from investing in these annuities because they permanently remove money from their sphere of taxation. But after a two year payback on what you would have owed on state income taxes, you are home free.

I have decided to use Fidelity Balanced Fund (FBALX) as the investment vehicle for my personal retirement annuity. This fund has a Morningstar 5 Star Rating, a beta of .89, and an expense ratio of .64. I will also pay .25 to Fidelity for servicing the annuity for a total expense ratio of .89. FBALX’s portfolio is about 65% stocks and 35% bonds and includes 10% foreign securities. The plan will be to accumulate shares via dollar cost averaging over a period of several years until the annuity holds 10% of my assets.

In case this sounds like an advertisement for Fidelity, I will add that I have no financial interest in the firm other than ownership of a mutual fund not mentioned.  🙂

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