What should I do with my annuity in its second year if the cap and spread values have been lowered?
I purchased an annuity last year. It just renewed for the second year, and they lowered the cap and the spread values. I didn't even know what they were. I tried to calculate the return for the first year and then for the second year to try and understand how it all works. It appears to me that the annuity company lowered the potential return for the second year. Should I have known what these were before I bought them? I reread the annuity document and saw where these exist and that they can be changed every year. Now, what do I do? Do the insurance companies use these values to cut our returns and enhance theirs, or do I not understand how annuities work?
Joshua Escalante Troesh, CFP
I am sad you have to deal with this and it’s unfortunately not uncommon for annuity sales representatives to misrepresent the annuity. As for what to do next, you should determine if it would be better to continue the annuity or give up the money you have already put into it and instead invest using a different strategy. Even though the annuity is a bad investment, there is also likely a penalty you will pay for cancelling the annuity. You may lose all or most of your investment to that penalty.
Explore Options to (Re)invest in an IRA
For many people, canceling the annuity and investing instead in an IRA or other retirement account will provide them with a more considerable retirement benefit than continuing with the annuity. This may not be an option for you, however, considering the annuity is only a year old (cancelling the annuity could have a hefty penalty that needs to be considered in the comparison calculations). At the very least, you should consider whether stopping investing in the annuity and diverting those funds toward an IRA would be in your best interest.
Getting Help with the Calculations
If you don't know how to do these calculations, please feel free to reach out and schedule a meeting. Purposeful Finance, a 501(c)3 nonprofit, also offers a free annuity analysis that helps you understand the difference in expected retirement benefit between an annuity and investing in an IRA, 401(k), or another retirement account. So long as you can find the needed information in the annuity contract, there is no charge. The information usually isn't difficult to find, and from your question, you are likely very capable of understanding the contract enough to find the information.
It’s not your fault
The annuity representative should have explained this to you and made sure you understood what you were buying. The contract/prospectus for annuities is very long and complicated, and I can confidently say many annuity sales representatives (calling themselves "financial advisers") don't fully understand their products.