Prudential Annuities launched its new Prudential Defined Income (PDI) Variable Annuity and Prudential Highest Daily Lifetime Income v2.1 (HD2.1). This is the newest version of its popular Highest Daily VA Benefit. For annuity clients 45+ in age, this offers a guaranteed lifetime income.
The unique feature of the PDI is its ability to grow your income every day until lifetime income begins through an investment in a mix of longer duration investment grade bonds, 100% allocated in the AST Long Duration Bond Portfolio. The Income Value is guaranteed to grow by 5.5% annually in deferral and then payout a lifetime of income at 5% annually. The product is designed so that these rates can be adjusted based on prevailing interest rates and other factors.
For an additional 1.0-1.6% annual fee, the HD2.1 allows the opportunity to “lock-in” the highest daily value of the portfolio. This gives you greater potential growth and therefore income. However, this version offers slightly lower guarantees. Growth in deferral is 5% and the payouts range from 3-6% based on age. Also, you have a HD Death Benefit as well which brings you to the higher range on the 1.6% fee.
Here are the tradeoffs between this innovative annuity concept and the rest of the industry. The biggest advantage to the HD2.1, you virtually guarantee increases to you Cash and Income Values because the gains are captured daily. The only way you don’t see increases is if you are unfortunate enough to buy and have the portfolio immediately decrease and never return to the “highest value” of when you bought in. At even 5% guaranteed growth, you have a competitive guaranteed growth in deferral. And with true market performance you have a significant upside potential. The Death Benefit feature is attractive benefit that very few annuities offer.
There are a few disadvantages too. Because of all the features of the product, you could see fees as high as 3% before Portfolio Management Expenses (or 12b-1 fees)…which means you could end up over 4% annually. Additionally, there’s this feature:
Proprietary Risk Management: A proprietary mathematical formula that monitors an investor’s account daily and automatically transfers amounts between the chosen variable investment portfolios and the AST Investment Grade Bond Portfolio
This means based on this formula, if the market decreases, you get moved into a bond account and are not reallocated back into your investment choices until the market comes back a sufficient amount. Therefore you are losing value, selling, waiting until a higher point, and then re-investing. Some detractors say this in essence causes you to sell low and buy high. And while you do still have your underlying guarantee on your income account, you are giving up some potential growth for this downside protection. Lastly, the payout percentages tend to be slightly lower (on the HD2.1 version) than competitors.