What
Is An Annuity?
An
annuity is a tax advantaged way to put aside
money
for retirement, or other, objectives.
Annuities
may
be among the best ways to create retirement income.
They
allow savings to grow tax-deferred, building
assets
faster than other investments.
The
way this works is that money is invested with
an
insurance company. Annuities may be a
good
investment
for many long-term goals, but several
features
make them especially well suited for
retirement
savings:
*
No Annual Investment Ceiling. There is
no limit
to
the amount that can be put into an annuity each
year. Other tax-advantaged plans such as IRAs
should
not
be overlooked for retirement savings, but the
amount
that can be contributed each year is limited.
*
The Power of Tax-Deferral. Money will grow
faster
than in a taxable vehicle with a similar rate of
return
for several reasons. Not only does the
interest
accumulate
tax-free until withdrawal, but funds that
otherwise
would have been used to pay taxes remain in
the
account for additional earnings. And if
the
payments
are not taken until retirement, the recipient
is
probably in a lower tax bracket at that time.
*
Security for One's Family. If the
purchaser
dies
before distributions begin, their family (or other
beneficiaries)
can receive the full value of the
annuity. By naming a beneficiary, the annuity may even
bypass
probate and eliminate the associated costs and
publicity.
*
Simplicity. There are no annual IRS forms to
file,
and there is no entry on Form 1040 until the
payments
actually begin.
An
annuity can offer the investment returns of a
mutual
fund, but deferring the tax until after
retirement. Though unglamorous, an annuity is one of
the
investment industry's fastest-growing products.
The
annuity also contains some of the tax-deferred
benefits
of an individual retirement account or
employer-sponsored
401(k) plan. Although it has been
available
for more than 20 years, sales have boomed in
the
last few years.
With
an annuity, savings grow, tax deferred, until
withdrawn,
with no restrictions on how much can be
invested
-- unlike an IRA or other retirement plan.
And
because an annuity is also an insurance
product,
it promises a guaranteed regular income after
retirement,
regardless of how long the investor lives.
Sales
of domestic annuities in the U. S. are now
running
around $50 billion per year. But the
real
reason
for the growth is that as the American
population
ages, it is waking up to the fact that
retirement
self-sufficiency is an important issue. The
annuity
has some ideal characteristics for them.
An
annuity, often described as the opposite of
life
insurance, is a financial contract with an
insurance
company. These can be structured so they make
regular
monthly payments for life, no matter how long
the
recipient lives.
While
technically the investor doesn't own the
investments
the annuity makes, he benefits from their
investment.
And because he doesn't own the investments
--
the insurance company does -- savings can grow, and
the
gains are tax-deferred.
Just
as with an IRA, no taxes are due on
investment
gains while the funds remain in the annuity
account. This helps savings grow faster, and it allows
individuals
to better control when they will pay taxes.
Taxes
are due when money is withdrawn. Just as
with
an IRA or 401(k) account, withdrawal of funds
before
age 59 1/2 incurs a 10 percent penalty.
While
these investments do enjoy tax-deferred
status
as do other retirement accounts, individuals
still
get greater tax savings under traditional IRA or
401(k)
plans, at least to the degree that contributions
to
those accounts are also tax deductible.
But once
beyond
the level of what can be deducted, annuities are
for
investors who want to build substantial tax-free
growth,
not just be limited to a government-mandated
maximum
amount of savings.
In
an IRA or other retirement account, initial
investments
under certain limits are deposited before
taxes. That allows wage earners to shield current
income
from tax, as well as allow investments to
accumulate
on a tax-deferred basis.
With
an annuity, the initial investment is made
with
post-tax dollars, although after that, investment
gains
are tax-free until withdrawn.
This
is a supplemental retirement tool, after all
the
other things. In an annuity one can set
aside as
much
money each year as retirement or other future
plans
require. Other tax-advantaged plans such
as IRAs
should
not be overlooked for retirement savings, but
the
amount that can be contributed each year is
limited.
Owning
an annuity also can prevent some tax
liability
that often hits mutual fund holders.
When a
mutual
fund is purchased, at the end of the year they
pay
a capital gains distribution, and even if they
reinvest
it, it is a taxable event. With a
variable
annuity,
any profit made, as long as it stays there,
grows
tax-deferred.
Other
considerations in selecting an annuity
include
important safety questions, such as the
financial
health of the insurance company guaranteeing
the
investment.
Because
annuities are insurance products, the fees
paid
by investors are different than for mutual funds.
Typically,
there are no front-end load fees or
commissions
to buy an annuity, but there are
"surrender"
charges for investors who withdraw funds
early
in an American annuity, usually during the first
five
or six years. (This is not the case in
the Swiss
annuities
discussed later.).
The
money in an annuity will grow much faster than
in
a taxable vehicle with a similar rate of return, for
several
reasons. Not only does interest
accumulate
tax-free
until withdrawal, but funds that would
otherwise
have been used to pay taxes remain in the
account
for additional earnings. And by the time
of
retirement,
the recipient is usually in a lower tax
bracket,
and will thus pay less tax on the annuity
payments.
Although
salesman like to point out that an
annuity's
value is "guaranteed," that promise is only
as
strong as the insurer making it. An
annuity is
backed
by the insurer's investment portfolio, which in
America
may contain junk bonds and troubled real estate
investments. If an American insurer has financial
problems,
the investor may become just another creditor
hoping
to be paid back. For example, when the
New
Jersey
state insurance department took over bankrupt
Mutual
Benefit Life, the state temporarily froze the
accounts
of annuity holders, preventing them from
withdrawing
money unless they could prove a significant
financial
hardship.
Some
American annuity marketers inflate their
yields
by playing games with the way they calculate
them;
others advertise sumptuous rates that have more
strings
attached than a marionette. The most
widespread
form of rate deception is the bonus annuity,
in
which insurers tack on as much as eight percentage
points
to their current interest rate. But many
of
these
alluring bonuses can be illusory. In
most cases
the
bonus rate is only paid if the annuity is held for
many
years, and then taken out in monthly installments
instead
of a lump sum. If the investor asks for
the
cash
in a lump sum, the insurer will retroactively
subtract
the bonus, plus the interest that compounded
on
the bonus, plus a penalty on the original
investment.
Even
more insidious are tiered-rate annuities --
so
named because they have two levels of interest
rates. They ballyhoo an above-average interest rate.
But
as with their bonus-rate cousins, the accrued
earnings
in the account reflect this so-called
accumulation
rate only when the payout is made over a
long
time. A straight withdrawal, by
contrast, will
knock
the annuity down to a low "surrender value" rate
for
every year invested.
Other
insurers simply resort to the time-
dishonored
practice of luring customers with lofty
initial
rates that are lowered at renewal time.
All
of this nonsense has given the American
annuity
industry a bad name, and it is not surprising
that
most investors simply hang up the telephone when
an
annuity salesman calls.
Enter
the clean, simple, honest Swiss annuity.
Swiss
Annuities
Swiss
annuities minimize the risk posed by U. S.
annuities. They are heavily regulated, unlike in the
U.S.,
to avoid any potential funding problem.
They
denominate
accounts in the strong Swiss franc, compared
to
the weakening dollar. And the annuity
payout is
guaranteed.
Swiss
annuities are exempt from the famous 35%
withholding
tax imposed by Switzerland on bank account
interest
received by foreigners. Annuities do not
have
to
be reported to Swiss or U.S. tax authorities.
A
U.S. purchaser of an annuity is required to pay
a
1% U.S. federal excise tax on the purchase of any
policy
from a foreign company. This is much
like the
sales
tax rule that says that if a person shops in a
different
state, with a lower sales tax than their home
state,
when they get home they are required to mail a
check
to their home state's sales tax department for
the
difference in sales tax rates.
The
U.S. federal excise tax form (IRS Form 720)
does
not ask for details of the policy bought or who it
was
bought from -- it merely asks for a calculation of
1%
tax of any foreign policies purchased.
This is a
one
time tax at the time of purchase; it is not an
ongoing
tax. It is the responsibility of the U.
S.
taxpayer,
to report the Swiss annuity or other foreign
insurance
policy. Swiss insurance companies do not
report
anything to any government agency, Swiss or
American
-- not the initial purchase of the policy, nor
the
payments into it, nor interest and dividends
earned.
Special
Advantages of Swiss Annuities
*
They Pay Competitive Dividends and Interest.
*
No foreign reporting requirements. A
swiss
franc
annuity is not a "foreign bank account," subject
to
the reporting requirements on the IRS Form 1040 or
the
special U. S. Treasury form for reporting foreign
accounts. Transfers of funds by check or wire are not
reportable
under U. S. law by individuals -- the
reporting
requirements apply only to cash and "cash
equivalents"
-- such as money orders, cashier's checks,
and
travellers' checks.
*
No forced repatriation of funds. If
America
were
to eventually institute exchange controls, the
government
might require that most overseas investments
be
repatriated to America. This has been a
common
requirement
by most governments that have imposed
exchange
controls. Insurance policies, however,
would
likely
escape any forced repatriation under future
exchange
controls, because they are a pending contract
between
the investor and the insurance company.
Swiss
bank
accounts would probably not escape such controls.
(To
the bureaucrats writing such regulations, an
insurance
policy is a commodity already bought, rather
than
an investment.)
*
Protection from creditors. No creditor,
including
the IRS, may attach a Swiss annuity, if the
purchaser's
wife or children are named as
beneficiaries. Liens cannot be attached to these
assets. This way, the purchaser knows that at least a
portion
of his wealth is beyond the reach of a
litigious
society and will, indeed, go to his
designated
heirs.
*
Instant liquidity. With the Swiss Plus
plan,
described
later, an investor can liquidate up to 100%
of
the account without penalty (except for a SFr500
charge
during the first year.)
*
Swiss safety. As already discussed,
Switzerland
has
the world's strongest insurance industry, with no
failures
in 130 years.
*
No Swiss tax. If an investor accumulates
Swiss
francs
through standard investments, he will be subject
to
the 35% withholding tax on interest or dividends
earned
in Switzerland. Swiss franc annuities
are free
of
this tax. In the U. S., insurance
proceeds are not
taxed. And earnings on annuities during the deferral
period
are not taxable until income is paid, or when
they
are liquidated.
*
Convenience. Sending deposits to
Switzerland is
no
more difficult than mailing an insurance premium in
the
United States. A personal check in U. S.
dollars
is
written and sent overseas (50› postage instead of
29›). Funds can also be transferred by bank wire.
*
Qualified for U.S. Pension Plans. Swiss
annuities
can be placed in a U. S. tax-sheltered
pension
plans, such as IRA, Keogh, or corporate plans,
or
such a plan can be rolled over into a Swiss-annuity.
(To
put a Swiss annuity in a U.S. pension plan, all
that
is required is a U.S. trustee, such as a bank or
other
institution, and that the annuity contract be
held
in the U.S. by that trustee. Many banks
offer
"self-directed"
pension plans for a very small annual
administration
fee, and these plans can easily be used
for
this purpose.)
*
No Load Fees. Investment in Swiss annuities is
on
a "no load" basis, front-end or back-end. The
investments
can be canceled at any time, without a loss
of
principal, and with all principal, interest and
dividends
payable if canceled after one year. (If
canceled
in the first year, there is a small penalty of
about
500 Swiss francs, plus loss of interest.)
