Notice of Annuity Adjustment

Variable annuities provide guaranteed income, as well as adjustments.

Variable annuities provide guaranteed income, as well as adjustments.

An annuity is a financial contract that makes regular payments in return for a lump-sum initial investment. When you buy an annuity, you agree to fixed or variable payments; the annuity can pay for a limited number of years or for the rest of your life. The annuity company might reserve the right to make changes to the payout, depending on various circumstances. For that reason, you might receive a notice of adjustment while the annuity is in effect.

Cost of Living Adjustments

An annuity contract will spell out the circumstances under which the annuity manager can change payments to the owner. An "inflation-adjusted" annuity, for example, allows owners to keep up with the rising cost of living. The federal government, for example, announced a 1.5 percent cost of living allowance for retired government workers drawing annuity payments for 2014. The amount of the increase is tied to the consumer price index, a government statistic that measures price changes in ordinary consumer goods.

Market Value Adjustments

You may also receive the notice if you're holding a market-value adjusted annuity, which changes in "surrender value" if interest rates fall. These annuities have a guaranteed minimum payout, but if you surrender them early, the amount of money you receive may be adjusted -- higher if rates fall, lower if rates rise. In this way, a market-value adjusted annuity acts like a bond. In general, if the annuity carries a life insurance feature, the death benefit paid to your beneficiaries remains fixed.

Variable Annuities

A notice of adjustment may arrive as a letter from the annuity company that announces a change in the payout rate according to the original contract terms. "Variable" annuity contracts offer a guaranteed payout rate, as well as a changing rate that the annuity manager sets each year based on interest rates and investment returns. The annuity may also set aside a portion of the income to be reinvested, rather than paid out, at the discretion of the owner.

Tax Considerations

Annuities payments may incur tax liabilities, but the Internal Revenue Service does not rely on notices of adjustment to document payment amounts or changes. That is accomplished with a Form 1099R, which documents distributions from pensions, annuities, retirement or profit-sharing plans, individual retirement accounts and similar investments. This information form lists the total of your annuity payments as well as any taxable portion. An adjustment in the payout from an annuity may mean a change in tax liability as income from the contract rises or falls each year.

 

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