Silver Divorce and Retirement Income Planning: Annuities

Divorce has financial consequences at any age, but the impact upon silver divorcees – divorcees aged 50 and above – can be particularly severe. With the number of couples divorcing later in life rising, financial planners are seeing an increase in clients who’ve experienced silver divorce. These clients need help developing retirement income plans that reflect their new reality.

This installment of the Silver Divorce blog series covers annuities. Investors approaching retirement gravitate toward annuities because of the guaranteed lifetime income stream they provide. But divorce can cause a significant disruption to annuities as they cannot simply be split as with other retirement assets.

Consider these suggestions to help your clients avoid costly errors and create an optimal strategy for fair, financially sound division of annuities.

Determine which type of annuity your client owns

Different classes of annuities each have their own provisions governing treatment in a divorce. There are qualified and non-qualified annuities, income annuities, deferred annuities – each demands a different approach. If your client doesn’t have the facts about their annuity, they should contact the insurance company where they purchased the annuity and ask for documentation.

Become broker of record if client is unable to discuss annuities with the issuer

An emotionally fragile client or a client uncomfortable with financial matters may ask the advisor to interact with the annuity issuer on their behalf. If a client delegates this task to the advisor, they must designate the advisor their broker of record in writing. Once the advisor is named broker of record, he or she may receive all communications to the policyholder and review policies and recommend changes.

Understand how an annuity is split

Few insurance companies will split an annuity. Most void the annuity, withdraw the funds, and rewrite the annuity as two new separate contracts or disburse the funds to one spouse and write a new contract for the other spouse. A withdrawal may be taxable and penalties may be assessed for the withdrawal. Ideally, the clients’ attorney will negotiate an agreement that minimizes the clients’ losses as part of the divorce decree. However not every client is fortunate enough to have an attorney who knows the rules for annuities, which are notably convoluted.

Learn what paperwork is required by custodians to to process an annuity transfer

Insurance firms, brokerage companies, mutual funds, or banks usually are custodians for annuities and each has its own requirement for transfer of assets. Tell your client to keep their original divorce decree in a safe place – it lays out the division of annuities and the custodian will need that information to enact a transfer. Some custodians use internal transfer forms while others may ask for letters from each partner, confirming the instructions.

Arrange your client’s holdings to be reviewed by an annuity expert if needed

Annuities are notoriously complex. It’s not unusual for couples to hold multiple annuities of different types and determining the financial impact involves a great deal of knowledge and calculation. For example, some contracts have premature surrender charges that drastically devalue the original contract. A withdrawal of 50 percent of funds most likely is considered an excess withdrawal, resulting in a reduction of any future guaranteed income. Ensure your client gets the optimal and equitable distribution of annuity assets and consult with an annuity expert if needed.

Splitting annuities can have grave consequences for late in life divorcees. It’s not uncommon for clients going through divorce to be emotionally preoccupied and unable to concentrate on important financial matters. As their advisor, you fill a vital role, focusing on the steps required to help clients rebuild and secure financial outcomes post-divorce.

The Retirement Income Certified Professional^® (RICP^®) designation from The American College of Financial Services provides advisors with expertise and comprehensive retirement income competencies that help them guide silver divorcees to a fresh start. Learn more now about how earning an RICP^® designation can accelerate your success as an advisor with this growing demographic.