Until about 20 years ago, a common question asked in the final months of the year was: “Should I take out another single-premium policy?”. The term of many of these policies has now expired. This means that decisions need to be made.
Single-premium policy
A single-premium policy is a life annuity policy in which a one-off lump sum is paid in instead of (annual) premiums. Under the tax regime in force up to and including 1991, substantial lump sums could be deducted from taxable income each year. In subsequent years, the deductible amounts were somewhat lower, but they were still well worth it.
As the premiums were tax-deductible, the benefits are, of course, subject to income tax. And if a lump-sum payment (surrender) is chosen, interest on the tax liability may be payable in addition to the tax (20% of the surrender value).
Annuity clause
Insurance policies taken out before 1992 are often endowment policies with an annuity clause. This means that, upon expiry, an annuity policy must be purchased using the capital accumulated in the policy.
The decision as to what type of annuity to purchase must be made no later than the year following the year of expiry (for a policy that expired in 2020, the decision must be made by 31 December 2021 at the latest). If the annuity has expired as a result of death, the period within which the choice must be made is extended by one year.
Wide selection
There is a wide range of options available, particularly with very old annuity policies that are still eligible for the transitional arrangements. Generally speaking, no revision interest is payable upon surrender of such a policy. In addition, there are options to have the payments benefit children (please note the gift tax).
Sometimes it is also possible not to claim the payout, but to continue investing through the policy. Whether this is a good option depends on your personal financial plans.
Stricter tax rules apply to newer policies, which means there are fewer options available.
Work out
Due to the various tax regimes that have applied to annuities over the years, it is often quite difficult to work out exactly what options you have with a policy that is about to expire.
We’d be happy to help you with that. To do so, we’ll of course need the policy or policies (preferably including the policy issued when the insurance was taken out).