How does an Annuity Income Work?

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When planning our future, several questions may arise: What is my retirement age? What is the maximum pension? And the minimum pensions? How many years do you have to contribute to retire? How can I invest my savings for when I finish my work stage? In relation to this last question, one of the options to take into account for those planning their future is the life annuity.

What is the life annuity?

The life annuity is the tool that transforms our savings into a monthly income for life, insurance that guarantees a peaceful old age without unforeseen events.

Make your simulation: Discover the ideal savings plan for your future

After planning retirement and saving for years to enjoy family and free time, it is important to have a global vision of accumulated assets and plan financially how to manage them. For what? To be able to make the most of the savings and dispose of them in the best possible way. That is the main function of the life annuity: to transform savings into a monthly income for life.

A life annuity is intended to cover a drop in our income, for example, when we retire, or when expenses increase, for example, due to health or because we want to have more leisure time. The life annuity is the optimal solution because it has many advantages: you pay fewer taxes, you can use it flexibly if you need more or less income, and you can even efficiently plan the inheritance.”

How does the annuity work?

It is very simple. An initial contribution is made and then a monthly income is charged for life, with which you will obtain an attractive return and an advantageous tax treatment. It is important to know that single contributions are allowed from only 601.01 euros. On the other hand, these are other of the many advantages that you will have:

  • Investment alternatives. It is possible to choose the product that best suits the needs of each one, with interest guaranteed temporarily or for life.
  • Liquidity whenever required if death insurance has been contracted.
  • The amount of redemption is recovered based on the market value of the linked investment.
  • One or two headlines. With two holders, the rent is paid until the death of the last of them. In the latter case, the other owner must pay the Inheritance or Gift Tax and will continue to collect the entire income, without withholding being applied to half of the income.

The sooner the Life Annuity is constituted, the higher the monthly income achieved. In addition, this product has a much higher financial-fiscal return than other alternatives such as term deposits.

This is how it can be seen in the following example, which shows a Life Annuity contracted with a contribution of €100,000 and monthly payment of the rent:

In terms of tax advantages, people who contract this product benefit from the best tax treatment, especially if they are over 60 years old, since a percentage of income, which depends on age, is not considered income from movable capital.

Key points of the taxation of pension plans:

  • The savings invested in a pension plan are fully deductible in the income statement.
  • Annual contributions are limited to a maximum of 2,000 euros. This amount must not exceed 30% of net earnings from work.
  • You can contribute a maximum of 240,000 euros to the entire product.
  • The pension plan reduces the marginal rate of personal income tax. The more you contribute to the pension plan, the more the tax base is reduced.
  • When you retire you can redeem your money in the form of income, capital, or in a mixed way and it will be taxed as income from work, that is, as extra income.
  • It is important to seek the advice of experts in this matter to optimize our private savings in tax matters.

The life annuity is not a risk product, it is a diversification product because it allows you to secure, with part of the savings, a monthly annuity for life.

Life annuity benefits

On the one hand, the possibility of being able to choose between different investment alternatives, that is, deciding on the most suitable product based on the client’s needs. On the other hand, as long as there is death insurance, the life annuity is liquid at all times. In relation to this case, the tax advantages of the product would be lost.

By aamritri

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