Annuity: an honest overview of the advantages and disadvantages
If you are an entrepreneur and want to build up a pension, you have to arrange this yourself. The most common way is to do this through an annuity policy. You can arrange this through insurers, banks or investment institutions. There are a number of advantages and disadvantages associated with this. In this article we explain which ones.
Annuity is an amount accrued with premiums/deposits for old age, which is paid periodically to a particular beneficiary. If you take out a policy for this, you therefore set aside money to be refunded later as a benefit on top of your AOW. Where pension is accrued through an employer, you arrange a pot for later with an annuity yourself. Taking out such a policy has a number of attractive advantages.
- Tax advantage
An important advantage is that you can deduct the amount you invest in your tax return. Premiums and deposits for annuity are - provided they meet the conditions and fall within the reservation space - fully deductible in income and corporate income tax.
Most providers of annuity products offer a positive return on the deposit. The final amount to be paid out is therefore often higher than the deposited amount.
Do you lack the discipline to periodically set aside an amount for the future? Then arranging an annuity is a way to build in security for the future without having to think too much about it. Because the depreciation of the premium is automatic and the accumulated amount is fixed, there is more certainty of financial space in the future.
While taking out a policy to arrange the above on a large scale offers a solution for entrepreneurs, there are also disadvantages. Insurers, banks and advisors who offer annuity policies will especially emphasize the benefits and are happy to calculate what profit can be achieved. But in the decision to build up an annuity, it is wise to also carefully study the small print and to be aware of any disadvantages. To help you get started, we've outlined some considerations below.
- Tax on distribution
The advantage of the deductibility of the premiums/deposits of the annuity policy has the downside that the payment of an annuity is taxed. The benefit therefore only applies during the period of accrual of the annuity. Only if the income is higher (e.g. box 3) than with distribution (e.g. box 1), you have actually had to pay less tax in the end. If not, in practice there is mainly deferred tax payment, instead of actual tax benefit. In addition, you have no guarantee that the tax rates will remain the same in the future.
While on the one hand you receive a return on your saved annuity, on the other hand you pay for your policy. Various parties charge closing costs and costs for management. Investment institutions can also charge costs of the funds and it is possible that providers (will) calculate a negative return. It is therefore important that - before you take out an annuity policy - you not only look at net return, but are well informed to see what return actually remains.
Finally, in addition to the aforementioned securities, the accumulation of annuity also has a number of uncertain factors that you have to take into account. For example, with investments there is always the well-known risk of losing (part of) your investment. In addition, more and more people are working with variable returns. For example, since October 2021 it is no longer possible at Rabobank to opt for a fixed interest rate on your annuity. Variable interest means that the interest on your investment can fluctuate over time. The risk is that it decreases or becomes negative. In the latter case, you pay money over your accrued annuity and you probably do not have more, but less left over than your deposit. There is also the risk that you want to access your accumulated capital earlier than the predetermined date on which the annuity is released. In that case, the policy is redeemable, but you do pay tax and revision interest (approx. 20%, as a penalty for having made false use of a tax advantage). Finally, inflation is an uncertain factor in annuity. If prices rise quickly, your money will be worth (much) less in x number of years than when you set it aside.
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You will have seen that arranging a reserve for later in a profitable and safe way requires the necessary deepening. There are plenty of providers with as much fine print that you don't want to overlook. The last thing you want is to get stuck with a usury policy, or eventually suffer financially. To arrange an annuity in the best possible way, you can, for example, read up on the site of the TaxAuthorities, and / or check comparison sites. Lexlupa provides independent advice and thinks along with you when it comes to insurance and other tax, legal and strategic choices as an entrepreneur.