What is a hybrid annuity?
A hybrid annuity is a retirement income investment that allows investors to allocate their funds between fixed rate and variable rate components. Investors can allocate their savings between conservative assets which offer a low but guaranteed rate of return and riskier assets which offer the potential for higher returns.
As with any annuity, the goal is to create a steady stream of income during retirement.
Understanding the hybrid annuity
A hybrid annuity offers investors more options for investing than a standard annuity. Their design allows part of an investor’s money to be placed in a mutual fund sub-account. The rest are kept separately to guarantee payment of a fixed amount after retirement.
Other hybrid contracts can couple a fixed annuity with an indexed product in order to better protect the principal in the two segments.
As with any annuity, hybrids can start paying immediately or be deferred with fixed or flexible premiums.
Among their positive points, hybrid annuities offer the possibility of increasing the investor’s income and hedging assets against inflation. The combination of fixed and variable components reduces the risk of downside.
As for the negatives, the double framework adds complexity to these products, which dissuades many investors. Hybrid products may also have higher fees.
In fact, most annuities provide growth and income. In other words, almost all indexed and variable annuity products today come with guaranteed income endorsements, which somewhat cancels out a major selling point for hybrids.
Target market for hybrid annuities
Hybrid annuities can be useful for those with longer time horizons. In general, annuities are suitable for investors who are looking for a stable and guaranteed retirement income. Pensioners cannot survive the income stream, which removes the risk of longevity.
In particular, the lump sum deposited in the annuity is not liquid. It is subject to withdrawal penalties. Annuities are not recommended for investors who may need to access their money.
Some investors may also consider withdrawing an annuity at a profit, although this is contrary to the investment strategy behind these products.
As with any investment, an investor’s risk tolerance must be taken into account before making an annuity purchase.