What to do to be able to maintain a good level of income at the time of retirement? Going into professional retirement represents a decrease in the net income of retirees. What could generate representative changes in your lifestyle? To complete the benefit received for retirement and maintain an adequate level of income, there are currently different forms of savings. One of these options that more and more people are opting for is the life annuity.
Retiring instead of generating the necessary tranquility for rest, generates concern among many of the retirees. Since their public pension salary is less than what they receive while active. Annuities are currently representing the ideal solution for this situation. According to a report by the ICEA (Cooperative Research between Insurance Entities and Pension Funds) about 2.5 million Spaniards have chosen this option to have a quiet and worry-free retirement.
What are life annuities?
Life annuities are a financial product of the insurance sector. It is the alternative that attracts all those people who want to supplement their public pension. Life annuities are savings policies through which the payment of a certain amount of money is guaranteed, periodically, after the payment of a previous premium. This type of insurance allows people to plan their savings and receive them again in the form of income from a certain moment.
In other words, in life annuity insurance, the policyholder makes a capital contribution, this can be one-time or periodic over a certain period of time, to increase it. This capital is a saving that the policyholder will receive in the form of income, from a certain age as agreed with the insurance company. In general, the payment of this rent is monthly, however, he can receive it with another periodicity.
The objective of a life annuity is to cover the drop in the person’s income at the time of retirement. They are also of vital importance when expenses for health issues increase or because people want to have more money to travel and enjoy their leisure time. The life annuity can be used flexibly depending on the amount of money needed and even allows efficient inheritance planning.
Who inherits a life annuity?
We cannot forget that an annuity is an insurance contract. Therefore, it is an agreement of wills, in which the policyholder is the one who decides who will inherit it in the event of his death. There are different alternatives in which the policyholder inherits the life annuity from him. One is that the hiring is done by two holders. If one of the owners dies, the other contracting party automatically inherits and will receive the amount established in the rent until his death.
Another alternative offered by life annuity insurance is to inherit it from a third party, not the owner of it. Being a savings product and not a risk product, the contract holder designates in it who will inherit the income at the time of his death. In this case, the policyholder can determine the way in which his heirs will receive the capital of the income. It can be in a single payment or in the form of income equal to what you have been receiving.
How are life annuities in Spain?
Currently, in Spain there are two types of life annuities:
In this type of income, the beneficiary begins to collect the month immediately following the deposit of the capital corresponding to the premium. In this case, the benefits that he is going to receive will depend on factors such as the age of the person who contracts, the sex, the probable life expectancy, and the amount of capital invested. It is beneficial for people over 60 who invest between 40,000 and 50,000 euros.
When this type of rent is contracted, the beneficiary begins to collect the rent as agreed in the contract on a certain future date. With this option, a 50-year-old person who signs the contract today can start collecting it at 65, that is, within 15 years. Regardless of the date on which the rent payment begins, it will be collected until the death of the owner.
How is it taxed to inherit a life annuity?
It must be clear that a life annuity is not the same as a perpetual annuity. This is collected by the heirs beyond the death of the beneficiary and is left from generation to generation. The life annuity, on the other hand, expires at the time of the death of the beneficiary, therefore, it does not form part of the estate to be transferred to the heirs. However, it has special clauses that allow it to be part of the inheritance.
When one of the holders dies, the other holder has to pay the Inheritance and Gift Tax and may continue to collect the total income. When the holders of the income die, the capital, if it was established in the contract, is included in the inheritance and is paid to the beneficiaries. This capital will be taxed by the Inheritance and Gift Tax. It will not generate any type of subsequent taxation in the Personal Income Tax because it is not compatible with the Inheritance and Gift Tax.
For whom is it more interesting to get one?
Undoubtedly, the older the person who acquires a life annuity, the more interesting it is for that person to obtain it. And, it is that the taxation of this instrument begins to be attractive for people from 50 years of age and really beneficial from 70 years of age. This financial product was designed primarily to complement retirement, it is an instrument that rewards all those who are close to retirement or who are already retired.
Except when the life annuity money comes from pension plans and other products that allow a deduction for contributions, that capital is taxed as income from savings and income from movable capital in personal income tax and is not taxed as income from work. This implies paying a lower amount of taxes in most cases. Additionally, only a percentage of the income received is paid. The same is reduced as the hiring age increases.
What types of rent exist?
There are 3 different types of life annuities depending on the redemption modality:
Modality of assigned capital
In this type of income, there is no possibility of recovering the amount of money invested. In other words, the initial premium is not recovered even in the event of the holder’s death. However, with this modality, you can receive a higher income than with the rest of the modalities. This is the prize for preferring total illiquidity.
Constant income or reserved capital modality
In this type of modality, it is possible to redeem the capital, that is, the contract can be canceled at any time. And, in the event of the death of the holder(s), the beneficiaries established in the insurance can collect the premium contributed by the holder. In this case, if it is the owner who decides to withdraw the money, they will only charge the market value. By having the possibility of rescinding your contract, the rent that is received is lower.
This type of modality, as its name indicates, is a combination of the previous two. In this type of income, the capital can be redeemed at any time, but at market value. In the event of the death of the beneficiaries established in the contract, they will only receive a percentage of the capital contributed, which will decrease over time. That is, it will decrease as the years go by since it was contracted.
Advantages of life annuities
Among the advantages of life annuities, we can mention security. It is a product that guarantees that the policyholder will receive an income every month regardless of what happens. Additionally, the beneficiary has the advantage of quietly enjoying their savings without thinking that they will end one day. The rent is received until his death. The insurer is the one who assumes the risk that the person lives above life expectancy.
As we mentioned before, life annuities are very advantageous for people over 50 years of age due to the taxation that corresponds to them, since they are taxed as income from savings and not from work, which is much lower. Additionally, they are an excellent means that allows the takers of the income to plan their inheritance. It is possible to choose the beneficiaries of the same, they can be all the natural heirs, one or only some, and even a third party.
Drawbacks and dangers
It is important to know the risks and dangers that life annuities may have before contracting one of them. One of these disadvantages is that there is the possibility of not recovering all the capital in advance if a deferred income was chosen. It may happen that there is a capital loss if the portfolio where the capital was invested has not done well. In addition, as it is savings insurance and not risk insurance, the interests they offer are limited.