Under EU law, an annuity is a financial contract that provides an income stream in return for an initial payment with a custom parameter. This is the opposite of residential funding. Swiss annuities are not considered a European annuity for tax reasons.
Video Annuity (European)
Anuitas segera
An immediate annuity is an annuity whose time between the contract date and the date of first payment is no longer than the time interval between the payments. The general use for immediate annuities is to provide pensions to retired persons or persons.
This is a financial contract that makes a series of payments with certain characteristics:
- either the rate or periodic payments fluctuate
- created annually, or more often intervals
- first or delinquent Length
- may be:
- fixed (specific annuity)
- over a lifetime or one or more people, may be reduced after the death of one person
- over the lifetime but not longer than the maximum number of years
- over the lifetime but not shorter than the minimum number of years
Specific annuities
Certain annuities pay annuitant for a specified number of years. This option is not suitable for pension income, since the person may live longer than the annuity paid annually.
Live annuity
Life-long annuities or live lifetime annuities are most often used to provide income in old age (ie, retirement). This type of annuity can be purchased from insurance companies (Ireland and the UK, Mortgage Guarantee).
This annuity can be compared with a loan made by the buyer to the issuing company, which then repay the original capital with interest to an annuitant whose life is based on the annuity. The loan term is assumed to be based on an annuitant life expectancy but a life annuity is paid until the death of the surviving annuitant. To ensure that income continues, investment depends on cross subsidies. Because population annuities can be expected to have a life span distribution around the average population (average) age, those who die early will support those who live longer (long life insurance).
Cross subsidies remain one of the most effective ways of spreading the amount of capital and return on investment provided during the lifetime without risk of exhausting funds.
Lifetime annuity options
While this will reduce the available payments, the annuity can be set to continue until the death of the last victim of two or more persons. For example, many annuities continue to pay (perhaps at a reduced rate) for couples of the main annuitant after his death, during the spouse's life. Annuities paid to couples are called reversionary annuities or annuity survivorships. However, if the annuitant is in good health, it may be more beneficial to choose a higher payment option in their life alone and purchase a life insurance policy that will pay income to survivors.
Other features such as the minimum warranty payment period regardless of death, known as a life with a certain period, or escalation where payments rise by inflation or a fixed interest rate every year can also be purchased.
Annuities with guaranteed periods are available from most providers. In such products, if death occurs within the warranty period, the payment continues to be made to the nominated recipient.
Disorders of life annuities for smokers or people with certain diseases are also available from some insurance companies. Because life expectancy is reduced, the level of annuity is better (ie higher annuities for the same initial payment). This can have an unfavorable appearance of one "bet against" the candidate.
Life annuities are priced according to the probability of surviving candidates to receive payments. Long life insurance is a form of annuity that precludes the commencement of payments until very late in life. A common long-term contract will be purchased on or before retirement but will not start paying until 20 years after retirement. If a candidate dies before payment begins there is no debt benefit. This drastically reduces the cost of annuity while still providing protection to the resources of someone who lives longer.
Maps Annuity (European)
Pending annuity
The second use for the term annuity came itself during the 1970s. This is an annuity suspension and is a vehicle for collecting deposits, and eventually distributes it either as a direct payment or as a lump-sum payment. Note that this is different from an immediate annuity.
Under the title of a suspended annuity, there are contracts that may be similar to
- bank deposit because they offer buyers interest in their money and a guarantee of payback, or
- stock index funds or other equity funds (such as ETFs), where growth or depreciation of accounts depends on market performance.
The contract may also be associated with other investments such as property (real estate) or government bonds, or a combination of the above options chosen by the investor or his advisor. All varieties of annuity annuity owned by an individual have one thing in common in many jurisdictions: any increase in the value of the no account is taxed until the profits are withdrawn. This is also known as deferred tax growth.
To complete the definition here, a deferred annuity in which benefits are set out, whether in the form of an all-in-one sum or annuity, may be called a fixed deferred annuity . Deferred annuities that allow allocation for stock or bond funds and whose account values ​​are not guaranteed to remain above the initial amount invested are referred to as variable annuities .
By law, an annuity contract can only be issued by an insurance company. They are distributed by, and available for purchase from, licensed banks, stock brokers, and insurance company representatives. Some annuities can also be purchased directly from the issuer, ie the insurance company that writes the contract.
In a specific direct annuity contract, a person will pay a sum of all at once or a series of payments (sometimes called annuity considerations) to the insurance company, and in return pay an annuitant series of periodic payments for the rest of their lives. The exact term of the annuity product is specified in the contract.
Similar to other types of insurance contracts, both immediate and deferred annuities will usually pay commissions to sales staff (or advisors ).
Various features have been developed by annuity companies to make their products more attractive. This includes death benefit options and life benefit options.
Investment considerations
Immediate annuity
Because immediate annuities generally provide a series of guaranteed payments, annuity firms usually match up to their obligations with government bonds and other high-grade bonds, and the market results available on these bonds are crucial to the retail price of the annuity. (Companies are usually required by law to invest their funds in this way, to reduce the risk of default.)
These investments are generally considered less risky than other investments, such as those associated with the stock market, and may offer expected lower returns. However, the annuity still does not protect the buyer against the effects of inflation, which is a material risk.
For many older people, the financial risk of living longer than expected and running out of money is a greater risk than investment risks such as falling stock market exposure. An immediate annuity protects against this risk.
Annuity count
Deferred retirement is often used as a saving vehicle by high-level taxpayers, because in some jurisdictions they get higher tax breaks on their pension contributions and their funds are accumulated without the return of taxable investments. The proceeds will be taxed when they are taken as a benefit, but may be at a lower rate. Those in lower tax brackets may be required to avoid deferred pensions because they may not be able to cover the costs incurred by the annuity company. (In some jurisdictions, some or all of the results must be by law applied to purchase pensions.)
Actuarial considerations
The actuarial formula is used to model the annuity and determine the price.
Payment options for immediate annuity
In technical language, the annuity is said to be paid for the defined status , this is a common word chosen in preference for words like "time", "term" or "period", as it may include easier within a certain period of time, or life or a combination of life. The magnitude of the annuity is the amount to be paid (and received) in the course of each year. So, if Ã, Â £ 100 will be received annually by someone, he is said to have "an annuity of Ã, Â £ 100". If the payment is made for half a year, it is sometimes said that he has "a semiannual annuity of Ã, Â £ 100"; but to avoid ambiguity, it is more commonly said he has "an annuity of £ 100, paid in half-yearly installments". Annuities are regarded as accrued during each instant of the status enjoyed, even though only paid at fixed intervals. If annuity enjoyment is postponed until after several years, the annuity is said to be suspended . If the annuity, instead of being paid at the end of each year, a half year, etc., is payable in advance, it is called annuity because . The annuity holders are called annuitant , and the person whose life depends on the annuity is called nominee .
Immediately after the annuitization, various options are available in the way the payout flow is paid. If an annuity is paid for a certain period independent of any possibility, it is known as an annuity with a certain period , or only a specific annuity ; if you want to continue forever, it's called eternity ; and if in the latter case it will not begin until after a few years, it is called suspending immortality . An annuity depends on the continuation of the life set or life is usually called a life annuity, but also known as a life-contingent or just a lifetime of annuity; but more generally the term "annuity" is simply understood as a life annuity, unless otherwise stated. Payments may also be paid during the lifetime of a candidate or for a fixed period, whichever is longer. This is known as life with a certain period .
A combination of these is when payments stop at death, but also after a predetermined amount of payments, if this is earlier: known as temporary life annuity . The difference with a given period of annuity is that a certain period of annuity will still pay after the death of the candidate until the period is over.
If not otherwise stated, it is always understood that annuities are paid annually, and that annual payments (or rent, as it is sometimes called) are single currency units.
Permanent examples are dividends on public shares in the UK, France and some other countries. So, although it usually talks about Ã, Â £ 100 consol, the fact is the annual dividend paid by the government in quarterly installments. The practice of the French in this case is arguably more logical. In talking about their public funds ( rent ) they do not mention the ideal amount of capital, but talk about annuities or annual payments received by public creditors. Another example of the length of time is revenues derived from the shares of railroad debt companies, as well as the liabilities typically paid for home property in Scotland. The number of year purchases in which a perpetual annuity provided by the government or railway company is realized on the open market, forming very simple tests of various governmental or rail credits.
In the United Kingdom, revenues from a mandatory purchase annuity purchased with pension funds or by an employer immediately after retirement (Hancock annuity ) are treated as taxable income. Revenue from purchasing life annuities, purchased in other ways, has elements that are regarded as payback, and only the excess over this is considered a profit that is subject to income tax. Elements that consider payback are based on life expectancy and will therefore increase with age.
Government incentives
Because cross-subsidies and annuity guarantees can give to run out of income and become dependent on the welfare state of the old age, annuities often have favorable tax treatment, which can affect how attractive they are relative to other investments.
Immediate annuities are a mandatory feature of certain retirement savings schemes in some countries, where the government provides tax cuts, provided that savings are paid to funds that can only (or primarily) be withdrawn as annuities. The Netherlands has such a scheme and the British Empire used to be one day. From 2003 tax cuts in the Netherlands are only allowed if, without additional savings, the old-age earnings will be less than 70% of current income. The French government currently honors a very unusual debt contract: annuities issued in 1738 and currently generate EUR1.20 per year.
English
In the UK contributions to pension savings are generally net of income tax (ie, tax breaks are available), to some extent. At retirement if an annuity is not purchased, retirement income up to age 75 can be withdrawn from pension funds using the withdrawal of retirement income commonly known as withdrawal . This is an unsecured pension, not an annuity which is a guaranteed pension guarantee. Unsecured pensions operate below the age-related income limit calculated by the Governance Department to prevent funds from being eroded too quickly. Before A-day, individuals may vary withdrawals between 35% and 100% of the maximum limit, recalculated every three years on what is known as the three-year review . After the changes were introduced by HMRC as part of the A-day law, individuals can now withdraw revenues between zero and 120% of "GAD levels". On reaching 75, the individual must then secure their pension fund with an annuity purchase, except that up to 25% of the funds can be taken as tax-free cash, also known as the commencement of retirement, or entry into a secure alternative pension (ASP). Under the ASP arrangement the income level should fall between 55% and 90% of the GAD tariff for a 75 year old. GAD tariffs are subject to periodic review and are based on the return of a single, unpaid monthly allowance paid or a value protection for an individual in good health. These numbers in turn are largely dependent on results and long-term mortality data.
Unsecured or guaranteed alternative pensions carry the investment risks of the invested pension funds and the death rates that occur from the loss of cross subsidies and advance the average age expectation that occurs at the time when the annuity purchase is delayed.
Pending annuity
Discontinued annuities are used in the UK public financial system as a means of reducing the National Debt. This result is achieved by substituting for a perennial annual cost (or one lasting until the capital it represents can be paid en bloc ), the annual cost of a larger amount, but lasting for the short term. The latter is heavily calculated to pay, during its existence, the capital it replaces, with interest at the rate assumed or agreed upon, and under certain conditions. The practical effect of substitution of the terminationable annuity for longer currency obligations is to bind the present generation of citizens to increase their own present and future obligations to reduce their successors. This ending may be achieved by other means; for example, by setting aside income from a fixed annual amount for the purchase and cancellation of debt (Pitt method, in the intent), or by fixing the annual debt costs at a rate sufficient to provide a margin for principal reduction of the loan. debt exceeds the amount required for interest (Sir Stafford Northcote method), or by providing an annual surplus of income on expenditures ("Old Sinking Fund"), available for the same purpose. All of these methods have been tried during British financial history, and the second and third are still in use; but overall the annulable annuity method is favored by finance and parliamentary ministers.
Discontinued Annuities, as employed by the British government, fall under two heads:
- issued to, or held by a private person;
- held by government departments or by funds under government control.
The important difference between these two classes is that the annuities below (1), once created, can not be modified except with the holder's agreement, ie practically irreversible without violation of public trust; that an annuity below (2) may, if necessary, be amended by interdepartmental arrangements under parliamentary authority. Thus the class annuity (1) satisfies the most perfect object of the system as described above; while the class (2) have the advantage that in emergency operations they may be suspended without inconvenience or breach of faith, with the result that government resources can on such occasions materially increase, irrespective of any additional taxation. For this purpose, it is only necessary to maintain as a cost on the income of the year, an amount equal to the lasting (smaller) cost which was initially replaced by a billable charge, where the difference between the two amounts is temporarily released. , while in the end the increased cost is extended for the same period with which it is suspended.
First class annuities (1) were first instituted in 1808, but were then governed by the 1829 action. They could be given either for a certain life, or two lives, or for an arbitrary length of time; and consideration for them may take the form of cash or government stock, the latter being canceled when the annuity is formed.
Annuities (2) organized by government departments originated from 1863. They were created in exchange for permanent indebtedness for the cancellation, major operations that had been carried out in 1863, 1867, 1870, 1874, 1883 and 1899.
This class annuity does not affect the public at all, unless of course its effect on the market for government securities. They are only a financial operation between the government, in its capacity as a savings bank and other funds, and itself, in the capacity of the national financial watchdog. Deposits of bank deposits do not care about the way in which the government invests their money, their rights are limited to interest receipts and deposit payments under certain conditions. This case, however, differs in the case of the forty million consol (included in the above figures), the property of the chancellor's suitors, which was canceled and replaced by annulables that could be terminated in 1883. Because of the responsibility to the applicants in the case for the specified amount of stock, special arrangements are made to ensure the final replacement of the exact stock amount is canceled.
Annuity calculation
The mathematical theory of life annuities is based on the knowledge of the mortality rate among mankind in general, or among certain classes of people whose lives depend on an annuity, looking at the present value of the actuary. In practice, only tables can be used, which vary in different places, but are easily accessible.
History counts live annuities or pensions
Abraham Demoivre, in his book Annuities on Lives, proposes a very simple death law: of 86 live-born children, 1 will die each year until the last death between the ages of 85 and 86. This law is agreed with quite well in the Middle Ages life with death inferred from the best observations of his time; but, as observations become more precise, the approach is not close enough. This is especially the case when it is desirable to obtain shared values ​​of life, contingent or other complicated benefits. Therefore, Demoivre law has no practical utility. There is no simple formula that has sufficient accuracy.
The mortality rate at each age, therefore, in practice is usually determined by a series of numbers inferred from the observation; and the value of annuities at any age are found from these figures by using a series of arithmetic calculations.
The first author known to have attempted to acquire, on the principles of true mathematics, the value of life annuities, was Jan De Witt, the great Dutch retiree and West Friesland. Our knowledge of his writings on this subject comes from two papers contributed by Frederick Hendriks to Assurance Magazine, vol. ii. (1852) p.Ã, 222, and vol. in. p. 93. The first contains a translation of De Witt's report on the value of life annuities, prepared as a result of a resolution passed by the states, on 25 April 1671, to negotiate funds by annuity life, and which were distributed to members on July 30 1671. The latter contains a translation of a number of letters addressed by De Witt to Burgomaster Johan Hudde, from 1670 to October 1671. The existence of De Witt's report is well known among his contemporaries, and Hendriks collects a number of quotes from various authors who refer to him ; but the report is not in the collection of his remaining works, and has been lost for 180 years, until Hendriks finds him among the Dutch state archives in the company with letters to Hudde. It was the first document on the subject ever written.
De Witt's death table
It seems that the long-standing practice in the Netherlands for a live annuity is given to nominations of all ages, in constant proportion to double the allowable interest rate on stocks; that is, if the city borrowed money of 6%, they would be willing to give a lifetime annuity of 12%, and so on. De Witt states that "annuities have been sold, even in this century, first on a six-year purchase, then at seven and eight, and that the majority of all current life annuities are at the cost of the acquired state on a nine year purchase"; but the price has increased in the years from the purchase of eleven to twelve years, and from twelve to fourteen. He also stated that the interest rate has been lowered from 6% to 5%, and then to 4%. The main object of his report is to prove that, at 4% interest, a lifetime annuity is worth at least sixteen years of purchase; and, in fact, that the annuity that bought the annuity for a young and healthy young prospect in a sixteen year purchase, made a very good offer.
He argues that it is more profitable, both from the state and from private investors, that public borrowing should be raised by giving life annuities rather than lasting annuities. It appears from De Witt's correspondence with Hudde that the mortality rate is assumed to be inferred from the actual deaths among nominees whose life annuity had been granted in previous years. De Witt seems to have come to the conclusion that the probability of death is equal in half a year from the ages of 3 to 53 inclusive; that in the next ten years, from 53 to 63, the probability is greater in the 3 to 2 ratio; that in the next ten years, from 63 to 73, it is greater in a ratio of 2 to 1; and in the next seven years, from 73 to 80, it is greater in a ratio of 3 to 1; and it places the limits of human life at 80. If the mortality table of the usual form is deduced from this presumption, of 212 people living at age 3, 2 will die each year up to 53, 3 in each of the ten years from 53 to 63.4 in each of the next ten years from 63 to 73, and 6 in every seven years from 73 to 80, when all will die.
De Witt calculates the annuity value in the following way. Assume that an annuity of 10,000 lives every ten years, which meets the mortality table Hm, has been purchased. Of this nomination 79 will die before reaching the age of 11 years, and no annuity payments will be made in connection with them; no one will die between the ages of 11 and 12, so the annuity will be paid for one year in 9921 souls; 40 reaches the age of 12 and dies before 13, so two payments will be made in connection with this life. Reasoning in this way we see that annuities on 35 nominations will be paid for three years; at 40 for four years, and so on. Continuing to the end of the table, 15 nominations reached the age of 95, 5 of whom died before the age of 96 years, so 85 payments will be paid in relation to these 5 lives. Of all the survivors, all die before reaching the age of 97 years, so annuities in this life will be paid for 86 years. Having previously calculated a table of certain annuity values ​​for each number of years up to 86, the value of all annuities on 10,000 nominations will be found by taking 40 times annuity value for 2 years, 35 times annuity value for 3 years, and so on - the last term is a value of 10 annuity for 86 years - and added it together; and the annuity value on one of the nominees will then be found by dividing it by 10,000. Before leaving the subject of De Witt, we can mention that we find in the correspondence a different suggestion of the law of death that bears the name Demoivre. In the letter of De Witt, dated 27 October 1671, he speaks of Hudde's "temporary hypothesis," that of 80 young lives (which, from context, can be taken at age 6) about 1 die every year. In steadfastness, therefore, the law in question may be more accurately called Hudde than Demoivre.
De Witt's report on the nature of unpublished state paper, although it contributes to the authors' reputation, does not contribute to advancing the precise knowledge of the subject; and the author to whom the credit should be awarded first shows how to calculate the value of the annuity on the correct principle is Edmund Halley. He gave the first true mortality table (summarized from the record number of deaths and baptisms in the city of Breslau), and shows how it might be used to calculate the annuity value of a nominated life of all ages.
Previously for Halley's time, and it seems that over the years later, all transactions with life annuities are based on estimates of mere allegations. The earliest known reference for any estimated life annuity value rose from the Falcidian requirements of the law, which in 40 BC. adopted in the Roman Empire, and which states that an heir may not give more than three quarters of his wealth in inheritance, so at least a quarter must go to his legal representation. It is easy to see how it sometimes becomes necessary, while this law applies, to appreciate the life annuities imposed on a heir's treasures. Aemilius Macer (A.D. 230) states that the methods that have been commonly used at the time are as follows: - From the earliest to 30 years requires 30 years of purchase, and for any age after 30 minus 1 year. It is clear that no consideration of compound interest can enter into these estimates; and it's easy to see that it's equivalent to assuming that everyone who reaches the age of 30 will surely live to the age of 60, and of course die. Compared to this estimate, the things put forward by prefectural prefects, Ulpian, are major improvements. The table is as follows:
Here also we have no reason to assume that the element of interest is considered; and assuming that between the ages of 40 and 50 each addition of one year to the age of the candidate reduces the annuity value by a one-year purchase, equals assuming that there is no possibility of a candidate dying between the ages of 40 years. and 50. Considered, however, only as a table of the average life duration, the value is quite accurate. On all occasions, no more precise estimates existed until the end of the 17th century.
Mathematical annuities have been fully treated in Demoivre's Treatise on Annuities (1725); Simpson's Doctrine of Annuities and Reversions (1742); P. Gray, Tables and Formulas ; Baily's Doctrine of Life Annuities ; there are also countless compilations of the Assessment Table and Interest Table , which means the value of an annuity at any age and any interest rate can be found. See also interest articles, and especially that about insurance.
The substitution table , so named in 1840 by Augustus De Morgan (see his paper "Regarding the Contingency of Single Life Contingencies, Warranty Magazine , xii.328), indicate the proportion in which the benefits to be paid at one age must be changed, thus retaining the same value and maturing at another age. The earliest known specimen of the replacement table is in William Dale's Introduction to Doctrine Annuities Studies , published in 1772. The full account of this work is given by F. Hendriks in the second number. from Assurance Magazine , pp.Ã, 15-17. William Minutes on Assurances , 1779, also contains a table of turns. Morgan provides the table as a convenient means to check the truth of annuity values ​​discovered by ordinary processes. It can be assumed that it realizes that the table can be used for the direct calculation of the annuity; but he does not seem to know about other uses.
The first author to fully develop the power of the table was John Nicholas Tetens, who was from Schleswig, who in 1785, while professor of philosophy and mathematics at Kiel, was published in German and was the introduction to Life and Warranty Annuity Calculations. This work appears to have been well known in England until F. Hendriks gave, in the first number of Assurance Magazine, pp.Ã, 1-20 (Sept. 1850), an explanation of it, with the translation of parts explains the construction and use of replacement desks, and sketches of author's life and writings, which we refer to readers who want more information. It can be mentioned here that Tetens also only provides specimen tables, does not seem to imagine that people who use their work will find it very useful to have a series of replacement tables, counted and printed ready to use.
The use of replacement desks independently developed in England - apparently between 1788 and 1811 - by George Barrett, of Petworth, Sussex, who was the son of a yeoman farmer, and himself a village headmaster, and afterwards served as a barkeep or bailiff. It is common to regard Barrett as the originator of the method of calculating annuity values ​​through the counting tables, and this method is sometimes called the Barrett method. (This is also called the method of change and method of the column.) Barrett's method of counting annuities described by him to Francis Baily in 1811, and first known to the world in a paper written by the last and read before the Royal Society in 1812.
With what is universally regarded as a misjudgment of unfavorable judgment, this paper is not recommended by the Royal Society council for printing, but is given by Baily as an appendix to the second problem (in 1813) of his work on life. annuities and guarantees. Barrett had counted large tables, and with the help of Baily, they tried to publish them by subscription, but to no avail; and the only printed table calculated according to the way, other than the specimen table given by Baily, are the tables contained in Babbage the Comparative View of Institutions for Life Insurance , 1826.
In 1825, Griffith Davies published his book Tables of Life Contingencies, a work which contained, among other things, two tables, which were admittedly derived from Baily's explanation of the Barrett table.
Those who wish to pursue the subject further may refer to the annex to Baily Annuity and Guarantee , De Morgan's paper "On the Contingencies of Single Life Contingency," Guarantee Magazine , xii. 348-349; Gray's Tables and Formulas chap. viii.; the introductory word for Davies's Treatise on Annuities ; as well as Hendriks's paper at Assurance Magazine , No. 1, p.Ã, 1, and No. 2, p.Ã, 12; and especially "Correspondence Account between Mr. George Barrett and Mr. Francis Baily" De Morgan, in Magazine Assurance , vol. iv. p.Ã, 185.
The main replacement tables published in the United Kingdom are contained in the following works: - David Jones, The Value of Annuities and Reversionary Payments , issued in part by the Community of Useful Knowledge, completed in 1843; Jenkin Jones, New Mortality Rate , 1843; G. Davies, Minutes on Annuities , 1825 (published 1855); David Chisholm, Legal Tables , 1858; Nelson Contribution to Vital Statistics , 1857; Jardine Henry, Government Commitment Annuity of Life , 1866 and 1873; Actuary Life Table , 1872; R. P. Hardy, Assessment Table , 1873; and the contributions of the sixth Dr William Farr (1844), twelve (1849), and twenty (1857) Reports of the Registrar General in English (English Tables, I. 2), and to English Life Table , 1864.
Source of the article : Wikipedia
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