Life annuities: are they an interesting alternative?

Life annuities are insurance solutions that guarantee their policyholder a secure income over a long period. Except in certain very specific situations, life annuity insurance has so far not met with great success: it did not represent a great interest both financially and fiscally, except for the insurer or broker who managed to place this type of product.

The principle of the life annuity consists of converting savings into an annuity and its taxation, at a rate of 40% as income, explains among other things the reasons why they have been largely shunned.

Until now it was readily advised not to take out life annuity insurance with pension fund assets, on the grounds that it was simply not profitable:

• Payment of capital LPP is subject to a single tax de facto reducing the capital dedicated to financing the life annuity,
• If the life annuity contract is provided for with restitution, the single premium paid is subject to the federal stamp of 2.5%, and
• The conversion rate of the life annuity is much lower than that practiced by pension funds and the annuity finally paid was until now taxed at 40% (transformation of capital consumption into partially taxable income).

These criteria significantly reduced the attractiveness of this solution. In addition, it could be more interesting to invest your savings prudently and create a capital consumption plan: more flexibility, capital consumption is not taxed on income and in many cases, capital remained to the heirs in the event of death.

However, today we can note a significant drop in the conversion rates practiced by pension funds (and the trend is not ready to stop), as well as uncertainties on the financial markets which could jeopardize a plan of capital consumption, even if carefully considered.

It is therefore particularly interesting to focus on a motion which was tabled in 2012 "End the tax penalty inherent in pillar 3b /Tax the return on assets upon their withdrawal and not the contributions", the flat-rate taxation of life annuities being considered too high given the lasting low interest rates that we have experienced.

This motion was included in a law whose referendum deadline expired on October 6 and its entry into force is scheduled for the first at the earliest january 2023. This new regulation will apply not only to new contracts but also to annuity insurance taken out in the past. This is good news for all beneficiaries of this type of contract and opens the way to new alternatives for people who wish to sustain their lifestyle within a non-penalizing tax framework.

From its entry into force, only the return component will be taxed as income and the annuity as such will be considered as non-taxable capital consumption. Furthermore, the revenue losses resulting from this measure would be partly offset in an environment of rising rates, given that the share of yield would also increase.

Based on all these observations, we can now consider that a life annuity contract offers an interesting alternative to the annuity of 2^e pillar with more flexibility:

• The annuity received would not be taxed, only the component of the return would be taxed (participation in surpluses, rate applied...)
• Flexibility regarding the type of life annuity contract:

• Immediate life annuity: payment of the annuity occurs immediately after payment of the single premium.
  • Deferred life annuity: payment of the annuity occurs on a predefined date. The capital, increased by interest, is converted into an annuity.
  • With or without restitution*: if the restitution option is chosen, in the event of death, the designated beneficiaries receive the restitution value of the capital. The LPP pension, in the event of death, is only paid to a restricted circle of survivors and under certain conditions. In many cases, unused capital is lost.
  • Life annuity on one or two heads: the survivor can continue to receive the life annuity, which the LPP annuity does not allow in most cases and under much less attractive conditions.

* 2.5% federal stamp if the option with refund is chosen.

This change in the taxation of life annuities is more than welcome and broadens the range of choices, particularly regarding the terms of payment of retirement benefits. There financial planning is and remains an excellent decision-making tool.