Bank Investment Consultant

In his article entitled "Reducing Retirement Anxiety" (May 1, 2008), Jack Sharry describes the "Guaranteed Retirement Income Solution",  "a new product underwritten by Phoenix and marketed in partnership with the LIS managed account at Lockwood Capital Managementt".   While Mr. Sharry does a fine job of explaining the concept of the "GRIS" and its potential benefits, a few corrections to his description are in order. 

1.  Mr. Sharry writes "Incidentally, although GRIS offers annuity-like income guarantees, it does not result in annuity-like ordinary income tax. Instead, taxation on the underlying investment is the same with or without GRIS."

That is not entirely correct.  In "Tax Consequences", the GRIS prospectus states:

"We intend to treat your GRIS as an annuity contract in reporting taxable income attributable to the GRIS to you and to the Internal Revenue Service.  Assuming the GRIS is correctly treated as an annuity contract for tax purposes, any GRIS payments made to you after your Account value has been reduced to $0 will be ordinary income to you that is taxable to the extent provided under the tax rules for annuities." (p.8)

However, Mr. Sharry's conclusion is entirely understandable, as the very next sentence of the prospectus says "We believe that, in general, the tax treatment of transactions involving investments in your LIS(2) Account more likely than not will be the same as it would be in the absence of the GRIS".

That appears, to me at least, to be a direct contradiction.  If distributions from the LIS(2) account –absent the GRIS feature - consist of realized and unrealized capital gains (as is generally the case with ETF portfolios), then some of those distributions should qualify for Capital Gains treatment (either long or short term).  However, no distributions from any annuity receive – under current law – such treatment.  All distributions from every annuity are, to the extent of "gain", taxed as Ordinary Income.

I will welcome any instruction on this point from anyone at Phoenix or Lockwood.

2.  Mr. Sharry explains the operation of the "GRIS" feature with the following example:  "Assume your client deposits $1 million in Year One. The fee your client will pay and the annual withdrawal she can take will be based on that income base. If in Year Two, her account value grows to $1.1 million, her withdrawal will be based on that amount, but the fee she pays will only increase if she chooses to lock in or "reset" her income base; otherwise, it continues to be assessed on the original income base".

Not according to the prospectus, which includes the following example –

You are 55 years old. You indicate that you will be the sole owner of the Account. Your

 Retirement Income Base will equal your Account value on the certificate effective date. On the certificate effective date your Account value is $500,000, so your Retirement Income Base will equal $500,000. You do not make additional contributions after the certificate effective date.

 You wait ten years until you reach your Retirement Income Date before you begin to take withdrawals from your Account to provide income payments for your retirement (or other long-term purposes). Your Account appreciates over this ten-year period, but because you do not make any additional contributions to your Account or exercise the Annual Optional Increase on any certificate anniversary date, your Retirement Income Base remains at $500,000. (emphasis mine)".

The "retirement income base" is increased by subsequent investments, but not by account growth unless the account holder elects to "step-up" that Retirement Income Base.

3.  While Mr. Sharry does acknowledge that the annual cost of the GRIS can be increased if such a step-up is elected, he does not mention the possible size of that increase.  Your readers may wish to know that the increase may be up to 400%!  The current cost of the GRIS is 1.25% for individuals and 1.40% if the Spousal Income Guarantee is chosen.  That cost may be increased, not only upon election of the "step-up" option, but also to the extent of any subsequent investment (resulting in a pro-rate rate adjustment), up to a maximum of 5%.

I point this out because Mr. Sharry observes that "the overall annual cost of GRIS and the managed account, including commissions and fees for investment management and income guarantees, is about 20% less than the cost of the typical variable annuity".  That may be true if one assumes that the Income Base is never "stepped-up".  However, if it is, the maximum cost of the GRIS will be substantially larger than any "Guaranteed Lifetime Withdrawal Benefit" rider in any variable annuity that I know of.  (Most GLWB maximum rates are about twice the currently charged rates).

Respectfully,

John L. Olsen, CLU, ChFC, AEP

Principal: Olsen Financial Group

Co-author: The Annuity Advisor (National Underwriter Co., 2005)