Life annuities protect retirees, are affordable, and protect the economy, all of which are deduced from the report “Solutions for retirement in the 21st century” carried out by AFI for UNEP.
A review of the current pension situation:
Retirement has become one of the main concerns of Spaniards in all age groups; current retirees have managed to get some improvements approved but only for the lowest pensions.
- The minimum pensions will increase by 3%, increasing the average pension to €622 per month.
- Non-contributory pensions will also have a 3% increase, up to €380/month.
- Pensions of up to €700 will raise the CPI (expected to end the year at 1.5%), and those between €700 and €860/month (€12,040/year) will do so by 1%.
- Widow’s pensions will raise their regulatory base by two points, from 52% to 56% only for those who are 65 years old or older and have no other source of income.
- With regard to personal income tax, pensioners will increase their exemption from taxation in the personal income tax from €12,000 to €14,000, and those who receive between €14,000 and €18,000 will also see their taxation reduced.
All this is pending approval of the General State Budgets for 2018.
And future retirees? , Social Security juggles to manage the sustainability of pensions:
Until now, drastic measures have been taken that make it more difficult to be a beneficiary of a retirement pension which, moreover, will not be as “generous” as the current one:
- Raise the legal retirement age to 67 years.
- Increase from 15 to 25 years the contribution period to calculate the regulatory base (base for calculating the amount of the pension)
- Revalue pensions according to the revaluation index and not the CPI. According to calculations by the International Monetary Fund, a revaluation of 0.25% per year for today’s retirees would reduce their purchasing power by 30% in 2050
- As of 2019, the application of Sustainability Factor, through which the amount of pensions is linked to life expectancy; the longer one lives, the lower the monthly pension will be. It is expected that in 2019 the calculations will be affected and that the pension will decrease by 0.45%; experts estimate that is if we are entitled to a pension of €1,000/month when applying the FS, it will become 995 €50/month. Although the question does not end there, according to the International Monetary Fund, the sustainability factor means that a worker who is 48 years old today will suffer a cut of 10%in the initial pension when you retire only due to the sustainability factor, which should be added the reduction in purchasing power resulting from applying the revaluation index indicated in the previous point.
According to the study carried out by International Financial Analysts (AFI), the loss of purchasing power of today’s retirees throughout their retirement will amount to €350 per month on average. This would represent 34% of the average cost per person in a household whose head of the family is retired.
Life Annuities, a solution to compensate for the loss of purchasing power that awaits us.
Annuity insurance is a form of life savings Erie Insurance, in which an insurance company, in exchange for a single premium, guarantees the insured person a periodic income until his death.
Life annuities are more efficient than equivalent financial products, as well as being safer by definition.
In the following comparative table, we can see that to constitute a life annuity of €350/month, whose single premium or initial capital would be received by the heirs in the event of the death of the insured or owner (counterinsurgency) if it is implemented through a financial product it would be An initial capital of €280,000 is required at age 75. In the case of an insurance or actuarial product, the single premium would be €262,500 at 75 years, which represents -6.25%.
If we choose to contract an annuity without, at 75 years of age, the single premium would be much lower and would only amount to €51,300.
The flexibility of life annuities.
Current life annuities are adapted to personal and family circumstances.
Do we want our partner to be able to continue collecting the rent in case we are absent? It would be a reversible rent, becoming an additional pension to the widow’s pension.
If what we want is to inherit all or part of the initial capital that we dedicate to our life annuity to our children, we would contract a life annuity with counter-insurance, knowing that in this case, the premium is higher since we have to pay not only the rent but the capital that you want to leave in inheritance.
Are we worried about needing more money after a certain date? We can contract from the beginning an amount of rent that varies throughout our lives, covering the possible dependency in older ages.
These and other assumptions give an idea of the flexibility of contracting and of the important social function of life annuities as insurance products.
It is not necessary to “be rich” to be able to ensure a good complement for our retirement; according to the 2014 Bank of Spain Family Financial Survey, households in which the head of the family is retired occupy a second place among households that greater net wealth per household accumulate.
In the following table, it can be seen that the average retired household in Spain has a net wealth of €185,000 (median), of which €60,060 corresponds to the net value of the habitual residence. Therefore, the average retiree would have “free” assets worth €124,940 that could be used to buy a life annuity to complement the amount of their public pension.
Bearing in mind that, as we have seen before, the cost of buying a life annuity of €350 per month without counter insurance for a 65-year-old person would be €77,000 (€51,300 for a 75-year-old person), and that the reduction in loss of purchasing power of the public pension for a 65-year-old retiree has been estimated at around €350 per month throughout his life with the reforms already approved, it seems that the accounts add up and that a 65-year-old retiree could compensate for the reduction in his pension by contracting a life annuity with a part of his savings and without this implying giving up his habitual residence.
The Taxation of Life Annuities
Another advantage of life annuities is their taxation; only a percentage of the income received will be taxed. The percentage of the annuity exempt from tax will depend on the age at the time of starting to receive the income, according to the following scale:
And the non-exempt part of the income? The non-exempt part of the income will be considered savings income and will be taxed as such.
If we continue with a previous example, a 65-year-old person who receives a lifetime monthly income of €350 would be exempt from taxation of 76% (€266) and of the remaining €80, 19% would be withheld as personal income tax ( €15.2), that is, the net income to be received would be €334.80.
The icing on the cake:
Suppose you are over 65 years old and the single premium with which the life annuity is constituted comes from the sale of an asset or right (second home, shares, funds, a taxi or pharmacy license, etc.) that generates a profit property. In that case, it can be exempt from personal income tax if you reinvest the amount of the sale in a life annuity.
