Life Annuity or Term Certain Annuity
2024
introduction
Life annuity or
Term Certain Annuity?
We all want to be able to enjoy a comfortable retirement and the best possible standard of living in retirement. There are many choices when it comes to annuities. It’s important to consider the bigger picture and a number of external factors before making your choice. In addition to the amount of the annuity, you need to consider tax issues, the duration of payment and inheritance. The main advantage of a life annuity is clearly the length of the payment period.
However, the life annuity has the same weak points as the annuity certain. Although limited in time, it offers a number of advantages.
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Life expectancy
Life
The subject may be debated, and the statistics may differ considerably, but the fact remains that life expectancy from the age of 65 is around 25 years. With this in mind, we have compared the best life annuity offers from our 35 partners.
We can see that lifetime payouts have become very low. In fact, the best conversion rate (% of capital converted into an annuity) is 3.9% for life. Thanks to the surplus (non-guaranteed variable part) we can find offers with a conversion rate of 4.2%. Thanks to this calculation, we were able to see that in order to fully recover the amount initially invested in his life annuity, he would have to live beyond the age of 24/25. Remember life expectancy at age 25. We also have to take into account the taxation of life annuities, which will further penalize returns and thus increase the target age at which you start to earn.
Unlike life annuities, annuities certain are not paid for life. Technically, it’s a redistribution of capital over a chosen period, which can be between 15 and 30 years. Taking an example at age 25, the conversion rate will be guaranteed at 4%, which is higher than that of the life annuity. To this can be added the current 0.5% non-guaranteed surplus. But that’s not all: the taxation of annuities certain is now even more advantageous, and will further increase the benefits of annuities certain. We’ll go into more detail below.
Differences in
Taxation
The taxation of the various life annuities or certain annuities is often neglected, even though they are very important in a retirement package. Let’s take a look at the main differences.
Life annuities
In the case of a standard life annuity (with restitution), there are several taxes to consider.
Firstly, stamp duty (a one-off tax), which amounts to 2.5% of the capital invested. This tax will therefore have an impact, reducing the conversion rate by around 0.1%. This will push back the age of profitability from 1 to 2 years. The annuity is taxed as income at 40%. We can calculate the precise taxation in your case in detail, but as an example, for a marginal tax rate of 25% (a relatively low rate), this is equivalent to reducing the conversion rate by a further 0.4%. In our age-of-return calculation, this time we’ll have to add 5 years before we’ll have a return on invested capital.
If you also take into account the tax consequences, you will need to live until age 96 to recover the capital initially invested in the life annuity.
Annuities certain
This time, let’s look at the taxation of annuities certain and its impact on the profitability of the solution.
Still taking the example of a guaranteed annuity over a 25-year period, you will recover 100% of the capital invested after 22 years on the guaranteed portion, and after 23 years if tax is taken into account. In fact, the annuity certain is not taxed on the capital redistribution portion, but only on the return obtained.
In short, with a guaranteed annuity, you’ll have to live to 87 or 88 to be a winner. What’s more, the capital sum of the annuity certain that will be paid to you during all these years will be higher than that of the life annuity, allowing you to enjoy a more pleasant retirement during your active years. In addition, the guaranteed annuity will continue until the age of 90, and will offer additional potential based on surpluses.
Made-to-measure advice
Depending on your canton and your assets, you may be subject to different tax rules. In fact, certain solutions will allow you to withdraw the entire amount invested from your assets, and are therefore preferable for high net worth individuals. We realize that every installation is different, which is why we pay particular attention to tailoring each solution to your needs.
Impact
Succession
Life annuities
For life annuities, there is a restitution value for the first 25 years. Pensions already paid are deducted from the initial capital, and should the insured person die within 25 years, the balance is passed on to his or her heirs.
After 25 years, no capital repayment is made, and you’ll need to live to at least 96 years of age to recoup your investment.
Annuities certain
With regard to the annuity certain, if you die within the chosen period (25 years in our example), the annuity will simply be transferred to your heirs, who will then become the policyholder and continue to receive the annuity. In this way, the guaranteed capital will be recovered and the surpluses will also be affected.
If there is an inheritance tax, it will be the same for both solutions and will be based on the restitution value at the time of death.
Need for
Liquidity
Unfortunately, this subject is all too often ignored when setting up an annuity. Indeed, the main objective is to ensure a long-term income. However, a financial situation may change and liquidity may be required. The consequences of withdrawing the capital invested during the payment of the two types of annuity will have a totally different impact.
As far as life annuities are concerned, the impact could be very significant. In fact, the tax authorities will consider part of the cash surrender value as income and add it to other income. Since income tax is generally very high, we recommend that you think carefully before having to recover the capital invested in your life annuity.
The annuity certain is not affected by a withdrawal. The money withdrawn will not be taxed, and the annuity certain will simply be readjusted.
Our conclusion
Today, retirement planning has become even more delicate and difficult. In fact, life annuities are no longer as attractive as they were a few years ago, and new solutions exist that may be more advantageous. Beyond the choice of company, we believe it’s essential to have access to the entire market before launching an annuity over a long period. As professionals, we can analyze each individual’s situation as a whole and put together an ideal retirement plan, taking into account taxation, returns, life expectancy and inheritance. We recommend a free consultation with one of our specialists.
Why ask for
advice?
- Official partners of 35 banks and insurance companies.
- Free retirement planning.
- Pension comparisons.
- Study of taxation in annuity calculations.
- Setting up the estate.
- Pension comparisons.
- Your personal specialist.
- Tips and tricks.
Sparta Group SA
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