If you buy an annuity, the income that you receive is fully exempt from personal tax.
Here is an example. Assume an annuitant invest $100,000 in an annuity and receive back a total of $150,000 during the lifetime. This comprise of a return of capital (ie $100,000) and the income earned on investing this sum, (ie $50,000).
The annuitant does not have to pay any personal tax on the full amount revieved as annuity.
If the annuitant had invested invested in other type of investment and earned an income of $50,000 over several years, this income will be taxed at the marginal rate. If this rate is an average of 10%, the tax payable is $5,000.
By investing in the life annuity, the annuitant enjoy this tax exemption and receives $5,000 more.
An annuity has a tax advantage. It is better to invest in an annuity, if the return given is competitive.
In the above example, if the total payout of $150,000 is received over 20 years, the annuity income for each year is $7,500. This represents an attractive return of 7.5% on the invested sum. However, this return comprise partly of the consumption of the capital and on the actual income earned.
NTUC Income offers an attractive return on our annuities. We now account for 60 percent of the market. The remaining 40% is shared by several life insurance companies.
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