Transamerica has introduced a registered index-linked annuity (RILA) that lets investors customize the product to best suit their risk profile, timeline, market outlook and financial goals. Known as the Transamerica Structured Index Advantage Annuity, it enters an unusually hot market: Fourth-quarter 2021 RILA sales were 26% higher than the prior year’s level, and last year sales popped 62% over the prior year’s level. Here’s an overview of this new policy.
Consider working with a financial advisor as you build a retirement plan.
What Is a Registered Index-Linked Annuity?
A registered index-linked annuity (RILA), formerly called buffered annuities or structured annuities, is designed to limit exposure to downside risk, while generating positive returns. Returns generated by a RILA are based on the performance of an underlying stock market index or indexes. The annuity does not invest directly in any stocks or equity securities.
RILAs are deferred annuities, in that the annuity owner begins receiving payments at a later date rather than right away. They’re sometimes referred to as buffered annuities or hybrid annuities because of the way they’re structured and what they’re designed to do. RILA annuities can offer some advantages over fixed-rate annuities and indexed annuities, in terms of the returns they may produce and the level of insulation against risk they provide.
What’s Distinct About Transamerica’s New RILA
While all RILAs offer buyers some choices, people buying Transamerica’s new RILA, which is available to investors aged 85 or younger, have an unusually large number of choices. Firstly, customers choose how long they wish to invest, a timeframe Transamerica calls “crediting periods.” These periods can be one, two or six years. Next, customers choose either the fixed-interest option that guarantees principal and a rate of interest for a 1-year crediting period or one or more indexes or exchange-traded funds. These include the S&P 500 Index and Fidelity World Factor Leaders Index, exchange-traded funds like the iShares U.S. Technology ETF and iShares Russell 2000 ETF.
Buyers of this RILA also set a level of protection – 10%, 15% or 20% protection buffers – to guard against market downturns. For example, consider the case of someone putting $100,000 into this RILA and choosing a 20% buffer. If the index falls 12% during the crediting period, their RILA remains worth $100,000. Alternatively, if the index falls 22% during the crediting period, their RILA only declines in value by 2%.
In addition, customers designate a cap, which is the maximum amount the investment can earn during the crediting period when the market is rising. For example, consider the case of someone putting $100,000 into this RILA and selecting a 100% cap. If the index rises during the crediting period by 110%, the RILA would climb 100% and be worth $200,000 rather than $210,000. Alternatively, if the index rises by 80% during the crediting period then the RILA would rise to $180,000.
Transamerica customers also can pay extra for a “Best Entry” option. That option resets the value of the account if shortly after the purchase the index it is linked to falls between a reset threshold and a reset maximum. For example, imagine a $100,000 RILA, with an initial index value of 1,000 promptly falls by 15% to 850, more than its 5% threshold value (the point at which the Best Entry provision kicks in) but less than its 20% maximum (the point beyond which the Best Entry provision offers no protection). At the end of the crediting period the index value has climbed to 1,100. Without the Best Entry option the account would be worth $110,000; with the Best Entry option the account would be worth about $129,000 (calculated by dividing the crediting period ending index value [1,100] by the Best Entry reset value [850], subtracting 1 and multiplying by 100 to get approximately 29%).
The company offers a free interactive tool so potential customers can explore how any given combinations of options fits or doesn’t fit a desired set of financial goals.
Who May and May Not Benefit From This RILA
In general, this type of annuity could be suitable for someone who:
- Is retired or getting close to retirement
- Has a long time horizon
- Prefers an annuity that offers returns comparable to stock market performance with built-in protection against potential downturns
- Wants upside potential returns but is less willing to stay invested during down markets
- Is interested in tax-deferred growth potential
The Transamerica policy is not designed for people who expect to take early or frequent withdrawals. It is also not an option for anyone who cannot put at least $25,000 into this product. Finally, this RILA is not available in New York or Oregon.
Bottom Line
The market’s convulsions during the pandemic, what can feel like out-of-control inflation and rising interest rates has helped spark interest in RILAs. Transamerica offers buyers numerous ways to customize their annuity. The choices let you build an annuity that reflects your market outlook, risk profile and timeline, among other factors. Before putting any money down, though, the myriad options this product offers needs to be thoroughly understood. Also, potential buyers should evaluate other newly launched RILAs with similar characteristics.
Tips on Retirement
- The complexity of a RILA can be overwhelming. That’s where the insight and guidance of a financial advisor can be valuable. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s no-cost retirement calculator to get a quick estimate of how you’re doing preparing for retirement.
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