Independent Review of the Transamerica Variable Annuity Series O-Share
What’s covered in this Review?
In this review we’ll cover the following information on the Transamerica Variable Annuity Series O-Share:
- Product Type
- Current Rates
- Realistic long term investment expectations
- What to expect, and what not to expect
Variable annuities like the Transamerica Variable Annuity Series O-Share offer investors a way to use dollar cost averaging to grow money tax-deferred without having to pay the capital gains tax when transferring between investment funds. If you are at or nearing retirement and income protection is on your mind, however, then many of the investment benefits offered by the Series O-Share may not be helpful to you. Sure, the Series O-Share can give you a way to structure income, but your investment options will be limited using “volatility control strategies” which may ultimately be more expensive and riskier as compared to other income producing annuities on the market.
If this annuity is being recommended to you as a way to protect your money during retirement, then you should know WHAT KIND of annuity it is, and WHAT PHASE of your financial life you are in before you buy.
The old-fashioned kind of annuities sold to your grandfather worked very much like a traditional pension: you traded in a lump sum of money in exchange for an income. Today’s investors have many more options. Generally speaking, you can think of annuities as coming in three flavors:
- Your fixed annuity as plain vanilla
- Your variable annuity as chocolate
- Your indexed annuity as a chocolate and vanilla swirl
This isn’t a perfect comparison, but it does point out that indexed annuities can do what both the variable and fixed annuity can do, and variable annuities, like chocolate, can seem sort of decadent and exciting because they participate in the stock market. Add the sprinkles and chocolate sauce of Living Benefits and income riders, and you can build yourself a regular annuity sundae.
Before buying any investment, you want to ask yourself what your priorities are. Variable annuities do two things: they grow money and then structure it for income. TransAmerica uses the terms accumulation phase and income phase to describe the different benefit components of their annuity. This is also a good way to look at the two different time periods in your financial life.
- The accumulation phase is when your goal is to invest and grow your money.
- The income phase is when your goal is to structure your investments for pension-like payouts.
If you are one of the millions retiring without a traditional defined-benefit pension, then an annuity might be a good idea, but you might also be worried about growth. With forces such as inflation and rising health care costs working against your every dollar, you might be concerned about capturing your share of the market gains.
A variable annuity may have been pitched to you as the perfect investment, combining both market growth and income protection all in one package, but is this the right annuity for you?
Congratulations – you’ve come to the right place to find out.
Annuity and Retirement Income Planning Information That You Can Trust
The folks at Annuity Gator are a team of experienced financial professionals dedicated to publishing the most comprehensive and easy-to-understand annuity reviews available today. We started writing these reviews way back before the other copycat websites out there because we recognized the need for a place where investors could go to get unbiased advice based on simple annuity facts.
Perhaps you went to a chicken dinner put on by your local financial advisor, or maybe your broker has talked to you about moving some or all of your money into a variable annuity. If you’ve been searching the Internet for facts about annuities, you’ve probably been distracted by a lot of marketing claims that make some pretty fantastic promises:
- Highest Payouts
- Lowest Fees
- Top Rated Companies
- Guaranteed Income For Life
- Professional money management
- Earn 7-8% Returns With NO Market Risk
We believe an informed consumer makes better decisions, which is why we go directly to the companies themselves and read over the prospectus on each annuity for you. We then present our findings in easy-to-understand language so you can decide for yourself whether or not the claims are true.
One of the most confusing things about annuities is the way the returns are calculated for the income payouts. The enhanced rate of returns offered on the purchase of an income rider is often dangled in front of you as the actual rate of return. These enhancements combined with index averages is what seems to give financial salespeople the leeway to say their variable annuity can earn higher returns upwards of 7 or 8% with no risk to your principal.
What they are really talking about has to do with the guarantees you pay extra for. You can get these same guarantees or better using other annuities and advanced strategies WITHOUT the fees and without the risk to your actual account value, but we’ll go more into that later.
For now, we want you to know that if you’ve come looking for facts and answers to your questions about annuities, you’ve come to the right place. At Annuity Gator, we do the investigative work for you to help you figure out whether or not an annuity like this one can best help you achieve your retirement goals.
Ready to get started? Let’s dig in:
Transamerica Variable Annuity Series O-Share at a Glance:
|Product Name||Variable Annuity Series O-Share|
|Issuer||Transamerica Life Insurance Company|
|Standard & Poor’s Rating||‐ is 4th highest of 21 ratings (as of May 12, 2016)|
Opening Thoughts on the Transamerica Variable Annuity Series O-Share
The folks at Transamerica offer a large selection of financial products and the Series-O is just one of nine variable annuities offered. From its humble beginnings in 1904 to the Transamerica Center that currently encompasses nearly one city block today, the message of the Transamerica insurance company has remained strong: financial security should be available to everyone. They strive to live up to this statement of inclusiveness by offering a wide variety of customizable annuities.
So, should the Series O-Share be included in your retirement portfolio?
A first glance at comparing all nine variable annuities reveals that the Series O-Share offers a “premium-based pricing structure” with the highest minimum initial premium payment as compared to the other variable annuities offered by TransAmerica. Perhaps this is to invite investors who are exiting the accumulation phase and already have a sum of money to roll over from a 401(k) or IRA.
If you are in the income phase of your life, you should know that this money is already tax-deferred, so moving it into a variable annuity like this one might only mean higher fees for you to pay and more commission for your financial salesperson to earn. (More on this later.)
If you are still in the accumulation phase of your life, you should be aware of the Premium Based Charge (AKA the “premium-based pricing structure”) assessed by Transamerica whenever you make a payment into this annuity. Each payment is subject to its own “premium-based charge” that will be deducted in quarterly installments for SEVEN YEARS after that premium payment is received by the insurance company. What does this mean?
Imagine you purchase this annuity with the $20,000 you have saved, TransAmerica assesses a 5% fee (or $1,000) and then you inherit $70,000 from grandma. Thank you, grandma! But now if you put that $70,000 into your variable annuity, you will be assessed the Premium Based Charge on the full amount of your deposit, or $90,000, for the next seven years. (The fee goes down as your deposit goes up, so now you will pay 4.5% on $90,000, or $4,050.) Assuming you put no more money into the policy, this fee alone would cost you a minimum of $29,350. Now, why would you want to pay that if you don’t have to?
But wait, there’s more.
If you surrender your policy, the total remaining premium-based charge (if any) will be deducted from the amount of your balance due. If you make a withdrawal which is greater than the surrender charge-free amount, a portion of the remaining premium-based charge will be deducted.
We’re not making this up, folks – it’s right there in the fine print of the prospectus. Generally speaking, variable annuities are one of the most expensive kinds of annuities that you can own. There are A LOT of fees to keep track of with these annuities, and the O-Share makes itself seem like a deceptively low-fee variable annuity. Problem is, the insurance company isn’t required to let you know about all of the fees incurred by the investment side of things.
Variable annuities invest in the stock market, which means the funds inside this annuity can go up and down in value. Meanwhile, the insurance company is trying to guarantee you a lifetime supply of income, so they will have to do something to protect themselves. What do they do?
They charge you higher fees, put limits on your investment options, and place limits on your income payout options.
The Series O-Share gives you two options for securing guaranteed income: Retirement Income Max® and Retirement Income Choice®1.6, both of which require the additional purchase of a rider. This means three things:
- Another fee
- Limits on your investment options
- Limits on your income payout amount
This might be a bad surprise for you if you’ve been listening to your variable annuity salesperson. The way your actual income amount is calculated is based on the underlying fund performance of the investments, which for a variable annuity means things get pretty complex.
Before we get into the nitty-gritty details, let’s take a moment to go over some necessary legal disclaimers . . .
This is an independent product review, not a recommendation to buy or sell an annuity. Transamerica has not endorsed this review in any way nor do we receive any compensation for this review. This review is meant to be an independent review at the request of readers so they could see our perspective when breaking down the positives and negatives of this particular model annuity. Before purchasing any investment product, be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances. All names, marks, and materials used for this review are the property of their respective owners.
How Transamerica Describes the Variable Annuity Series O-Share:
Transamerica advertises the benefits and features of this annuity on their website as follows:
- A comprehensive lineup of investment options from some of the most recognized money managers in the industry.
- Dollar-cost averaging for gradual investment over time, systematically buying more units when prices are low and fewer units when prices are high.
- Twelve free transfers between sub accounts allowed each year without a fee.
- Income options to maximize your retirement income that offer protection during down markets.
There are also a few other perks, but that covers the basics. If you want to find the website and/or prospectus, you can click HERE.
How Financial Advisors Might Present This Annuity to You
People who come to us asking questions about annuities are often sold these investments without having them fully explained. While the prospectus for this particular annuity warns that this product “does NOT guarantee profits or prevent losses in a declining market,” most people don’t take the time to read the prospectus and we certainly don’t blame you – it’s really not any fun to read. But it can be especially difficult to figure out exactly what you are getting
You might hear concepts presented by your financial salespersons such as:
- This investment performs better than other annuities out there.
- It will give you security by providing a guaranteed lifetime income.
- The benefit will grow or step-up every year that you wait to access it.
Let’s start with performance. The investments offered inside this variable annuity are diverse, but if you are in the accumulation phase of your life, you should know that inside this variable annuity, you’re actually buying from a limited selection of mutual funds. Furthermore, if you are in the income phase of your life, these funds are NOT guaranteed.
If you were to buy mutual funds directly from the different companies out there (such as Charles Schwab, TD Ameritrade, Fidelity or Vanguard for example), you would have a virtually unlimited list of choices and no fees from the insurance side of things.
Inside a variable annuity, you are offered different share “classes” with different charges. In this case, you get to choose from the Series O-Share. The mutual funds are called “proprietary sub-accounts” because often times, the insurance company creates contracts with mutual fund firms to develop a specific mutual fund for their variable annuity contract.
There is a management fee associated with each fund and some funds even have facilitation fees. Furthermore, because a variable annuity is a securities product backed by a life insurance company, you are also paying the insurance company for the risk associated with these investments.
You might hear from your advisor that these annuities perform so well, they make up for the higher fees. What they are talking about when they say this is the “enhancements” or “step-ups” offered by the Series O-Share annuity.
So let’s talk about these income benefits. The benefits offered by the purchase of either Retirement Income Max® or Retirement Income Choice®1.6 offer a 5.5% annual compounded growth even in down markets. Now, this can be a great thing if you understand what you are getting and income is what you really need. But here’s the thing, folks:
This annual 5.5% growth is not a guarantee on the fund performance.
The growth rate associated with the income rider is applied during your accumulation phase, and it is NOT a guaranteed rate of return on the account value. Rather, it’s the rate of growth applied to what we call the “funny money” account because you cannot withdraw this money as a lump sum.
In other words, if you want to make a down payment on a condo, you can’t take out the money that is growing at 5.5%. Furthermore, withdrawing your money may cost you not just surrender charges, but it might cancel the 5.5% guaranteed growth benefit. Here is a quote that is taken directly from the prospectus that speaks to this: “If a withdrawal has occurred in the current rider year, growth will not be applied.”
The bottom line for you: there are other investments out there that may give you much better benefits whether your goal is growth and accumulation or income and preservation, and all for much lower fees.
What About the Fees?
Throughout this review, we’ve talked about why variable annuities have to charge more fees than other kinds of annuities because of the risk inherent in the investment. We’ve tried to prepare you for the fees, but how they are calculated for your exact situation will be different depending on the features and benefits you choose. Here is a breakdown of all the types of fees you can expect to pay:
- Mortality and Expense Risk Fee: .60%
- Administration Charges: 0.15%
- Premium Based Charge: 1.5% to 5.0%
- Optional Highest Death Benefits: .45% to 1.95%
- Optional Guaranteed Lifetime Income Benefit Rider: 1.45% to 2.20%
- Fund Facilitation Fees: .20% to .30%
- Portfolio Annual Operating Expenses: .54% to 1.44%
Fee Total: 4.89% to 11.64%.
(Note: this does NOT include the surrender charge (maximum 5%) or the annual service fee of $15 to $50.)
These fees go to work directly against any gains or returns earned by your investment. Imagine you have $100,000 inside the Series O-Share annuity, and you elect the least expensive rider available in order to get the guaranteed growth enhancement of 5.5%. When you subtract this 5.5% guarantee from the lowest possible fee of 4.89%, you get a net return of .61%. In a year when the market drops or breaks even, you won’t even keep up with the average annual rate of inflation which is at 3.22%. And your actual account could still go down in value, and then you would have to pay the fees on top of a loss. Ouch.
The Annuity Gators End-Take on the Transamerica Variable Annuity Series O-Share.
Where it works best:
- A place to grow money tax deferred for someone already taking advantage of the maximum IRA and 401(k) amounts.
- As a source of guaranteed income delivered by a reliable company.
- Benefits that can continue for a spouse and cannot be outlived.
Where it works WORST:
- For investors who are NOT taking advantage tax-deferred IRA opportunities or their employer 401(k)
- For the investor who is either entering or already in the income phase of life.
- For investors who don’t like fees.
- For investors who have a low-risk tolerance.
- For investors who do NOT want to be in the stock market.
The O-Share variable annuity requires a minimum investment of $10,000 to take advantage of proprietary funds and guaranteed benefit options, however, the fees inside this annuity can be high. Each payment is subject to its own “premium-based charge” that will be deducted in quarterly installments for seven years after that premium payment is received by the insurance company. The benefits offered by the two income packages may be desirable for the retiree entering the income phase of life, but the enhanced growth rate of 5.5% is on a separate “funny money” account and it applies to the time period before you take the income.
In terms of growth, the Series O-Share offers you a way to take advantage of the tax-deferred growth available in all annuities. Beware, however, that financial salespeople often pitch the 5.5% enhanced benefit rate as a guaranteed interest rate of the growth of the funds rather than part of the benefit you receive with the purchase of a rider.
As an income producing investment, this annuity offers two guaranteed lifetime income options, however, the enhanced return of 5.5% is activated during the accumulation phase of the investment and can be canceled if you make a withdrawal.
So what does all this mean to you? When you combine the fees inside the Series O-Share with the exposure to market risk, you get a very expensive way to guarantee lifetime income. We feel that there are other annuities and income strategies out there that can give you better benefits for fewer fees.
Thanks for bearing with us on this rather long post. If you found it helpful, please spread the word and share it with others. If you’d like to have your annuity tested against other annuities out there, drop us a line – we’re happy to run a comparison to make sure you are getting the best benefits for your situation.
Lastly, like all humans – we also make mistakes. If you see one on this review please reach out and let us know, especially since the terms may have changed since we published this review. We are always more than happy to make corrections and give credit where it is due. If you’re an investor and this review causes confusion and creates questions, feel free to reach out as well. We can’t always get back right away, but we can usually clear up any questions within a day or two.
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