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The skinny on secondary market annuities
Question: I am retired and would like to safely increase income. What is a secondary market annuity? Is it a suitable vehicle for putting a portion of retirement funds to safely increase guaranteed retirement income? Are there issues to be aware of with the secondary market annuities? How should this product be purchased? Thanking you in advance for any light you can shine on this topic. Ronald, Rhinebeck, NY
Answer: Like so many retirees earning next to nothing on their fixed-income investment, you'd like to "safely increase guaranteed retirement income." Secondary market annuities -- also known as factored structured settlements -- offer lush yields in comparison to safe Treasuries, CDs and the like. But it isn't a product that will "safely increase guaranteed retirement income." My bottom line: Steer clear of the product.
The time-honored insight holds: A higher yield means greater risks. I don't see anything "safe" about a secondary market annuity for the average retiree.
These securities come at the end of a long daisy chain. Stripped down, the basic process essentially runs along these lines. Someone wins a wrongful death or injury lawsuit. The settlement is paid out through an annuity. Howeverhe beneficiaries need income now. They sell the annuity and its income at a big discount to a specialty company called a factoring firm. The factoring firm, in turn, transforms the stream of income into a packaged security. The security is sold by brokers to individual investors.
I think you can see that it's a market for genuinely sophisticated investors with both the means and the insight to diligently research the underlying product.
Jason Zweig, the savvy investment columnist for the Wall Street Journal, offer a typically smart overview of the investment here.
But as is so often the case when investments are promoted on the basis of high yield, these deals are unsuitable for most investors. Even in the rare situations when they might make sense, you must proceed with extraordinary caution.
The title of his article sums up well why most retirees and average individual investors should stay away from secondary market annuities: Another Can't-Miss Deal That Can Miss Spectacularly.
Hello above, and 1 now below
I looked into these a few months ago after hearing daily talk radio pumping of them.
Though there is a risk of refusal to pay transferees, IMO the greater risk.. is getting paid!
The ones I saw had a tax structure that was Horrendous.
You paid taxes on near 100% of your payout the first few years and that slowly diminishes to near zero at the end of 10 -30 years.
You're paying taxes on or own money return (15-35%) immediately
So front-loaded is the burden it produces a Negative return IMO
And so bad I would gladly 'write' these myself shift my tax burden - guaranteed.
It's as if they have been Restructured by the writer TO shift the burden
And recommend NOT making recommendations until you are more familiar with them as the article is just a cursory glance.
Chris-
Your assessment that Secondary Market Annuities are more complicated than standard investments is absolutely correct. However, that alone is not a reason to disregard this marketplace, and your quick judgment to "steer clear" does not do justice to your readers. Properly structured, Secondary Market Annuities can form the basis of a very safe, high-yield fixed income allocation for individual investors. There are firms that have completely buyer-centric purchase processes in place that protect buyers with outside legal review, third-party escrow, and broker-dealer compliant oversight.
I would welcome a dialogue with you or with any reader on your site or elsewhere on the merits and risks of the marketplace.
