Government Incentives

Annuity Government Incentives

Because of cross-subsidy and the guarantees an annuity can give against running out of income and becoming dependent on state welfare in old age, annuities often have a favourable tax treatment, which may affect how attractive they are relative to other investments.

Immediate annuities are a compulsory feature of certain pension saving schemes in some countries, where the government grants tax deductions, provided that savings are paid into a fund which can only (or mainly) be withdrawn as an annuity. The United Kingdom and the Netherlands have such schemes. From 2003 the tax deduction in the Netherlands is only allowed if, without additional savings, the old age income would be less than 70% of the current income.

In the UK contributions into pension savings are generally free of income tax, up to certain limits. Although a number of different regimes exist, personal pension funds taken out since 1988 must use at least 75% of the fund to purchase an annuity by the 75th birthday of the annuitant. If an annuity is not immediately purchased retirement income up until this age can be drawn from the fund by using Pension Income Withdrawal formerly (and still frequently called) Income Drawdown. This operates under a strict code of rules and limits according to age and figures said by the Government Actuarial Department to prevent the fund being eroded too fast. Individuals may vary withdrawals between 35% and 100% of a maximum limit, that is reset every three years - known as the triennial review. Income Drawdown carries both the investment risk of the invested pension fund and mortality drag that occurs from the loss of cross subsidy and advancing average age expectancy that occurs in the time over which annuity purchase is delayed.

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