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What is Currently Happening with Annuities in the US and UK

The following is a guest post.


Annuities seem like a sound investment. You invest a lump sum and pay no tax on the interest; however, there are some points to make note of when it comes to withdrawing your money. Currently annuity rates are in freefall across the globe, but there are some areas of which you need to be aware.

In the US, if you were to withdraw your annuity in a lump sum, say at retirement, you would also have a lump sum of tax to pay.

The US government stipulates that any money included in the lump sum you paid in is free from taxation, as the assumption is that you will have already paid tax on that money before investing it.

The government will treat the interest on this lump sum as ordinary earnings, meaning that you will pay normal tax rates for the interest earned in each year depending upon what those rates were when the interest was calculated. This would mean that you essentially wouldn’t get any tax breaks.

In the UK the policy differs. The UK government will do the same as the US and will leave your lump sum invested tax free, but in addition to that they will also count part of your interest as a return on your investment, so only part of the interest gained would be subject to tax – even then lower income earners, non-tax payers and basic rate tax payers, could pay half or even no tax.

In the US, a similar system is applied if the money is taken out as a percentage each month. If you “annuitize” in the US then an exclusion ratio is applied to 49.4% of your interest of which you won’t be taxed. So it would seem that annuitizing your annuities is the better option for those in the US, but in the UK the difference is not so drastic.

My Pension Expert’s Scott Mullen said: “Annuities rates have fallen in the UK and the US in recent years due to the current economic climate. The banking crisis has led to record low interest rate on both sides of the Atlantic which is having a knock on effect on current annuity rates. This is because annuity providers use secure types of financial products such as corporate bonds and government bonds to provide the income for their annuity book as these types of investment are usually safe and low risk.

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