Better in their words…

Has some down-sides, but might be worth a look.
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By ANNE TERGESEN –  WSJ Updated Sept. 10, 2015 1:51 p.m. ET

A new product intended to help retirees avoid running out of cash late in life is now available to holders of individual retirement accounts at Fidelity Investments.

The Boston financial-services company said Thursday it has begun offering “qualified longevity annuity contracts” from three companies— Principal Financial Group, Guardian Life Insurance Co. and MetLife Inc.—to its IRA investors. Having multiple choices may help investors obtain higher income payments, says Bill Johnson, executive vice president in Fidelity’s actuarial department.

These products are a variety of “deferred-income annuity,” or “longevity insurance,” which was difficult to include in retirement accounts until a 2014 change in federal tax rules.

Like a plain-vanilla immediate annuity, deferred-income annuities allow purchasers to convert a lump sum into a pension-like stream of income for life. But because they delay the start of income payments—until, say, age 80 or 85—they can offer retirees a relatively low-cost way to purchase, at age 60 or 65, a guaranteed income stream that provides security in later years.

Currently, for example, a 65-year-old man paying $100,000 for an immediate annuity can get about $6,792 a year for life, according to ImmediateAnnuities.com, which provides free quotes from insurers. But with a policy that starts payments at age 75, his annual payout would be $15,744. And if he waits until age 85 to start collecting, he would receive $53,892 a year.

Deferred-income annuities have started to catch on with consumers, many of whom lack defined-benefit pension plans. In the first six months of 2015, insurers sold $1.2 billion of these contracts, up from $200 million in all of 2011, according to Limra, a nonprofit insurance and financial-services research organization.

The reason that deferred-income annuities used to be hard to incorporate into traditional 401(k)s and traditional IRAs is that tax rules generally require the owners of these accounts to start taking withdrawals, known as required minimum distributions, on their full account balances at age 70½.

The new tax rules give certain qualifying deferred-income annuities relief from those rules, provided their owners begin collecting income by age 85 and put no more than 25% of their traditional-IRA money and no more than 25% of a 401(k) account into such an annuity, up to an overall maximum of $125,000.

As a result, someone who uses $100,000 of a $400,000 IRA to buy a qualified longevity annuity can calculate RMDs on only the remaining $300,000, says Ed Slott, an IRA expert in Rockville Centre, N.Y. (Because Roth accounts aren’t subject to RMDs during the owner’s lifetime, the new rules on longevity annuities—including caps on purchases—don’t apply to them.)

In total, nine insurers currently offer QLACs, although more are likely to come to the market soon, according to Limra. So far, only MetLife is offering a QLAC for the 401(k) market, Limra says. Fidelity isn’t offering a QLAC for 401(k)s.

Greater adoption in 401(k)s is likely to hinge on regulatory action. Until the U.S. Labor Department offers 401(k)-plan sponsors a set of “safe harbor” guidelines for the selection and monitoring of insurers, employers are unlikely to add the annuities to 401(k) investment menus, says Kelli Hueler, chief executive officer and founder of Hueler Cos., which offers an annuity marketplace.

Fidelity already offered non-QLAC deferred-income annuities.

One benefit of deferred-income annuities—both those that meet the QLAC requirements and those that don’t—is that they can take some of the guesswork out of retirement planning. It is easier to figure out how to make a retirement nest egg last until the annuity payments begin than it is to figure out how to stretch it over an uncertain lifetime.

But these products have downsides. You must surrender your principal to the insurer—and if you die before payouts begin, the insurer keeps your money. If you are willing to settle for a lower income, you can ensure your heirs a death benefit.

In addition, the payments won’t keep up with inflation unless you purchase a feature that adjusts them annually by a set amount.

In part because payouts on immediate annuities are near multiyear lows, advisers say it can make sense to spread purchases over a few years. If interest rates rise, so will the payments received from future purchases.

Write to Anne Tergesen at anne.tergesen@wsj.com