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An annuity switch brings higher rate, and costs

Q I have had an annuity with Company X since 1992. But an officer in my bank suggests that I close it out and instead invest in an annuity with Company Y. Company Y pays 6 percent interest and never less than 3 percent. Company X pays about 4 percent. Under plan Y, if I withdraw any principal in the first year, I must pay a penalty of about 8 percent. The rate is prorated downward each year. There would be no penalty if I withdrew money from Company X. After the five years with Company Y, I can withdraw any amount without a fee. I am 89, a widow. Should I switch?

Name withheld, Boise, Idaho

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A "Changing to Company Y would give you a little more income but far less flexibility," says Tim Schlindwein, who heads up financial consulting firm Schlindwein Associates, in Chicago. "If you had to withdraw even a third of your principal in the first year with the new company, you would in effect lose all your interest earnings."

If the amount of your annuity is very large, he says, you might come out ahead with the higher-interest payment. But if the annuity amount is average, or small, "you would need to seriously determine if the lost interest earnings from a premature withdrawal would outweigh the advantage of switching to a slightly higher rate."

Also, ask your bank officer if he earns a commission for selling you the new annuity. If so, that should make you cautious about switching, Mr. Schlindwein says.

QWhat is the difference between a no-load mutual fund and a low-load fund? Is there a good reference book on low loads? Is there a trend toward low loads?

I.C., Queens, N.Y.

AA "load" is a commission charge paid to the seller of the fund's shares.

Most load funds run about 6 percent for the first year. A low load is about 3 percent. A no-load fund has no sales charge.

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According to the Chicago-based American Association of Individual Investors, it is getting harder to distinguish between load, low-load, and no-load funds, since many funds now charge a whole raft of fees. Always find out if a fund has hidden charges, the AAII recommends.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com

(c) Copyright 2000. The Christian Science Publishing Society


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