Why The Lifetime Annuity Payout Legislation Should Be Supported
In November 2001, the Lifetime Annuity Payout Act, H.R. 3320, was introduced in the House of Representatives by a bipartisan group of Representatives–Phil English, R-Pa., Karen Thurman, D-Fla., and Nancy Johnson, R-Conn.
In this article, I will tell you why I think you should pay attention to this bill and support its enactment.
What would the Lifetime Annuity Payout Act do?
As its sponsors recently explained in a letter to other members of the House, H.R. 3320 “encourages individuals to use annuities to guarantee themselves lifetime retirement income.”
The proposal provides this encouragement by making available a tax incentive to those who use after-tax dollars, i.e., monies not held in a qualified plan, to purchase life contingent annuity payments. H.R. 3320 would tax lifetime annuity payments at capital gains tax rates rather than at the higher rates applicable to ordinary income.
Although the typical non-qualified annuity owner is in the 28% tax bracket, under current law, annuity payments can be taxed at rates as high as 38.6%. Under H.R. 3320, lifetime annuity payments would not be taxed at rates higher than 20%, and for many people, the maximum rate would be 10%.
What types of annuity payments would be eligible for the lower tax rates?
Any type of life contingent annuity payment would be eligible for the lower rates. For example, payments under a life annuity with 10 years of payments guaranteed would be eligible. Payments under a life annuity that guaranteed a return of premium paid into the contract also would be covered. Both fixed and variable annuity payments are covered by the bill.
Likewise, life contingent payments resulting from the purchase of an immediate annuity and those resulting from the annuitization of a deferred annuity would receive the lower tax rate. H.R. 3320 would apply to all eligible annuity payments received in calendar years beginning after the date of enactment.
What is the reasoning behind the Lifetime Annuity Payout Act?
In recent years, Congress has wisely focused on the need for all Americans to save and accumulate assets for their retirement. This focus has resulted in enactment of new and additional incentives for employers to establish and maintain qualified retirement plans and for employees to participate in those plans.
However, Congress has long recognized that employer sponsored retirement plans are only part of the retirement equation.
In addition to drawing income from employer plans, Americans are, and will continue to be, dependent on Social Security and personal savings to achieve an adequate level of retirement income. Indeed, in a recent survey, fully 52% of working annuity owners stated that they expect personal savings to be a major source of their retirement income. (Committee of Annuity Insurers, 2001 Survey of Owners of Non-qualified Annuity Contracts.)
Furthermore, life expectancies are continuing to increase. Industry sources suggest a female age 65 has a 50% chance of living to age 85 and a 25% chance of living to age 92. As participation in defined benefit plans decreases, the need for retired individuals to have a source of income that will last as long as they live will only grow greater.
In this environment, creating an incentive for individuals to use some of their retirement savings for life contingent annuity payments as a supplement to Social Security and employer sponsored plans makes perfect sense.
What can we do to help build support for the LAP bill?
You can help members of Congress, other government officials, the media and the public at large to understand lifetime annuities and the value they bring to retirees.
Thats important because Congress has time to consider only a limited amount of the many worthwhile pieces of legislation that are introduced each year. It often takes several years to build sufficient support for even the most important legislation.
Furthermore, given that the federal budget is limited and enactment of the LAP bill will presumably reduce federal tax receipts by some amount, those who already appreciate the value of lifetime annuity payments need to speak out in favor of H.R. 3320.
You have many opportunities to do this. For example, members of Congress regularly visit their districts to discuss issues and matters of interest with their constituents. When you have an opportunity to speak with representatives in Congress, ask them if they are familiar with the Lifetime Annuity Payout bill. If they are not, offer to discuss with them the role of life annuities in effective financial planning and urge them to support the bill.
If you work for a business with a government relations office, enlist the expertise of individuals in that office to build support for LAP.
Similarly, if you are a member of an organization that is active in Washington, inquire whether the group is aware of the Lifetime Annuity Proposal and if it supports H.R. 3320.
These combined efforts will help H.R. 3320 become law. When that happens, many more retirees can be assured that their income will continue as long as they live.
, a partner with Davis & Harman LLP in Washington, D.C., is counsel to the Committee of Annuity Insurers. The committee supports the LAP bill, as does the American Council of Life Insurers and the National Association for Variable Annuities.
Reproduced from National Underwriter Life & Health/Financial Services Edition, April 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.