SWISS ANNUITIES -- SAFE AND SECURE What Is An Annuity? An annuity is a tax advantaged way to put aside money for retirement, or other, objectives. Annuities may be among the best ways to create retirement income. They allow savings to grow tax-deferred, building assets faster than other investments. The way this works is that money is invested with an insurance company. Annuities may be a good investment for many long-term goals, but several features make them especially well suited for retirement savings: * No Annual Investment Ceiling. There is no limit to the amount that can be put into an annuity each year. Other tax-advantaged plans such as IRAs should not be overlooked for retirement savings, but the amount that can be contributed each year is limited. * The Power of Tax-Deferral. Money will grow faster than in a taxable vehicle with a similar rate of return for several reasons. Not only does the interest accumulate tax-free until withdrawal, but funds that otherwise would have been used to pay taxes remain in the account for additional earnings. And if the payments are not taken until retirement, the recipient is probably in a lower tax bracket at that time. * Security for One's Family. If the purchaser dies before distributions begin, their family (or other beneficiaries) can receive the full value of the annuity. By naming a beneficiary, the annuity may even bypass probate and eliminate the associated costs and publicity. * Simplicity. There are no annual IRS forms to file, and there is no entry on Form 1040 until the payments actually begin. An annuity can offer the investment returns of a mutual fund, but deferring the tax until after retirement. Though unglamorous, an annuity is one of the investment industry's fastest-growing products. The annuity also contains some of the tax-deferred benefits of an individual retirement account or employer-sponsored 401(k) plan. Although it has been available for more than 20 years, sales have boomed in the last few years. With an annuity, savings grow, tax deferred, until withdrawn, with no restrictions on how much can be invested -- unlike an IRA or other retirement plan. And because an annuity is also an insurance product, it promises a guaranteed regular income after retirement, regardless of how long the investor lives. Sales of domestic annuities in the U. S. are now running around $50 billion per year. But the real reason for the growth is that as the American population ages, it is waking up to the fact that retirement self-sufficiency is an important issue. The annuity has some ideal characteristics for them. An annuity, often described as the opposite of life insurance, is a financial contract with an insurance company. These can be structured so they make regular monthly payments for life, no matter how long the recipient lives. While technically the investor doesn't own the investments the annuity makes, he benefits from their investment. And because he doesn't own the investments -- the insurance company does -- savings can grow, and the gains are tax-deferred. Just as with an IRA, no taxes are due on investment gains while the funds remain in the annuity account. This helps savings grow faster, and it allows individuals to better control when they will pay taxes. Taxes are due when money is withdrawn. Just as with an IRA or 401(k) account, withdrawal of funds before age 59 1/2 incurs a 10 percent penalty. While these investments do enjoy tax-deferred status as do other retirement accounts, individuals still get greater tax savings under traditional IRA or 401(k) plans, at least to the degree that contributions to those accounts are also tax deductible. But once beyond the level of what can be deducted, annuities are for investors who want to build substantial tax-free growth, not just be limited to a government-mandated maximum amount of savings. In an IRA or other retirement account, initial investments under certain limits are deposited before taxes. That allows wage earners to shield current income from tax, as well as allow investments to accumulate on a tax-deferred basis. With an annuity, the initial investment is made with post-tax dollars, although after that, investment gains are tax-free until withdrawn. This is a supplemental retirement tool, after all the other things. In an annuity one can set aside as much money each year as retirement or other future plans require. Other tax-advantaged plans such as IRAs should not be overlooked for retirement savings, but the amount that can be contributed each year is limited. Owning an annuity also can prevent some tax liability that often hits mutual fund holders. When a mutual fund is purchased, at the end of the year they pay a capital gains distribution, and even if they reinvest it, it is a taxable event. With a variable annuity, any profit made, as long as it stays there, grows tax-deferred. Other considerations in selecting an annuity include important safety questions, such as the financial health of the insurance company guaranteeing the investment. Because annuities are insurance products, the fees paid by investors are different than for mutual funds. Typically, there are no front-end load fees or commissions to buy an annuity, but there are "surrender" charges for investors who withdraw funds early in an American annuity, usually during the first five or six years. (This is not the case in the Swiss annuities discussed later.). The money in an annuity will grow much faster than in a taxable vehicle with a similar rate of return, for several reasons. Not only does interest accumulate tax-free until withdrawal, but funds that would otherwise have been used to pay taxes remain in the account for additional earnings. And by the time of retirement, the recipient is usually in a lower tax bracket, and will thus pay less tax on the annuity payments. Although salesman like to point out that an annuity's value is "guaranteed," that promise is only as strong as the insurer making it. An annuity is backed by the insurer's investment portfolio, which in America may contain junk bonds and troubled real estate investments. If an American insurer has financial problems, the investor may become just another creditor hoping to be paid back. For example, when the New Jersey state insurance department took over bankrupt Mutual Benefit Life, the state temporarily froze the accounts of annuity holders, preventing them from withdrawing money unless they could prove a significant financial hardship. Some American annuity marketers inflate their yields by playing games with the way they calculate them; others advertise sumptuous rates that have more strings attached than a marionette. The most widespread form of rate deception is the bonus annuity, in which insurers tack on as much as eight percentage points to their current interest rate. But many of these alluring bonuses can be illusory. In most cases the bonus rate is only paid if the annuity is held for many years, and then taken out in monthly installments instead of a lump sum. If the investor asks for the cash in a lump sum, the insurer will retroactively subtract the bonus, plus the interest that compounded on the bonus, plus a penalty on the original investment. Even more insidious are tiered-rate annuities -- so named because they have two levels of interest rates. They ballyhoo an above-average interest rate. But as with their bonus-rate cousins, the accrued earnings in the account reflect this so-called accumulation rate only when the payout is made over a long time. A straight withdrawal, by contrast, will knock the annuity down to a low "surrender value" rate for every year invested. Other insurers simply resort to the time- dishonored practice of luring customers with lofty initial rates that are lowered at renewal time. All of this nonsense has given the American annuity industry a bad name, and it is not surprising that most investors simply hang up the telephone when an annuity salesman calls. Enter the clean, simple, honest Swiss annuity. Swiss Annuities Swiss annuities minimize the risk posed by U. S. annuities. They are heavily regulated, unlike in the U.S., to avoid any potential funding problem. They denominate accounts in the strong Swiss franc, compared to the weakening dollar. And the annuity payout is guaranteed. Swiss annuities are exempt from the famous 35% withholding tax imposed by Switzerland on bank account interest received by foreigners. Annuities do not have to be reported to Swiss or U.S. tax authorities. A U.S. purchaser of an annuity is required to pay a 1% U.S. federal excise tax on the purchase of any policy from a foreign company. This is much like the sales tax rule that says that if a person shops in a different state, with a lower sales tax than their home state, when they get home they are required to mail a check to their home state's sales tax department for the difference in sales tax rates. The U.S. federal excise tax form (IRS Form 720) does not ask for details of the policy bought or who it was bought from -- it merely asks for a calculation of 1% tax of any foreign policies purchased. This is a one time tax at the time of purchase; it is not an ongoing tax. It is the responsibility of the U. S. taxpayer, to report the Swiss annuity or other foreign insurance policy. Swiss insurance companies do not report anything to any government agency, Swiss or American -- not the initial purchase of the policy, nor the payments into it, nor interest and dividends earned. Special Advantages of Swiss Annuities * They Pay Competitive Dividends and Interest. * No foreign reporting requirements. A swiss franc annuity is not a "foreign bank account," subject to the reporting requirements on the IRS Form 1040 or the special U. S. Treasury form for reporting foreign accounts. Transfers of funds by check or wire are not reportable under U. S. law by individuals -- the reporting requirements apply only to cash and "cash equivalents" -- such as money orders, cashier's checks, and travellers' checks. * No forced repatriation of funds. If America were to eventually institute exchange controls, the government might require that most overseas investments be repatriated to America. This has been a common requirement by most governments that have imposed exchange controls. Insurance policies, however, would likely escape any forced repatriation under future exchange controls, because they are a pending contract between the investor and the insurance company. Swiss bank accounts would probably not escape such controls. (To the bureaucrats writing such regulations, an insurance policy is a commodity already bought, rather than an investment.) * Protection from creditors. No creditor, including the IRS, may attach a Swiss annuity, if the purchaser's wife or children are named as beneficiaries. Liens cannot be attached to these assets. This way, the purchaser knows that at least a portion of his wealth is beyond the reach of a litigious society and will, indeed, go to his designated heirs. * Instant liquidity. With the Swiss Plus plan, described later, an investor can liquidate up to 100% of the account without penalty (except for a SFr500 charge during the first year.) * Swiss safety. As already discussed, Switzerland has the world's strongest insurance industry, with no failures in 130 years. * No Swiss tax. If an investor accumulates Swiss francs through standard investments, he will be subject to the 35% withholding tax on interest or dividends earned in Switzerland. Swiss franc annuities are free of this tax. In the U. S., insurance proceeds are not taxed. And earnings on annuities during the deferral period are not taxable until income is paid, or when they are liquidated. * Convenience. Sending deposits to Switzerland is no more difficult than mailing an insurance premium in the United States. A personal check in U. S. dollars is written and sent overseas (50› postage instead of 29›). Funds can also be transferred by bank wire. * Qualified for U.S. Pension Plans. Swiss annuities can be placed in a U. S. tax-sheltered pension plans, such as IRA, Keogh, or corporate plans, or such a plan can be rolled over into a Swiss-annuity. (To put a Swiss annuity in a U.S. pension plan, all that is required is a U.S. trustee, such as a bank or other institution, and that the annuity contract be held in the U.S. by that trustee. Many banks offer "self-directed" pension plans for a very small annual administration fee, and these plans can easily be used for this purpose.) * No Load Fees. Investment in Swiss annuities is on a "no load" basis, front-end or back-end. The investments can be canceled at any time, without a loss of principal, and with all principal, interest and dividends payable if canceled after one year. (If canceled in the first year, there is a small penalty of about 500 Swiss francs, plus loss of interest.) Swiss Plus A new Swiss annuity product (first offered in 1991), Swiss Plus, brings together the benefits of Swiss bank accounts and Swiss deferred annuities, without the drawbacks -- presenting the best Swiss investment advantages for American investors. Swiss Plus, is a convertible annuity account, offered only by Elvia Life of Geneva. Elvia Life is a $2 billion strong company, serving 220,000 clients, of which 57% are living in Switzerland and 43% abroad. The account can be denominated in the Swiss franc, the U.S. dollar, the German mark, or the ECU, and the investor can switch at any time from one to another. Or an investor can diversify the account by investing in more than one currency, and still change the currency at any time during the accumulation period -- up until beginning to receive income or withdrawing the capital. If you are not familiar with the ECU, it is the European Currency Unit, a new currency created in 1979. It is composed of a currency basket of 11 European currencies, and its value is calculated daily by the european Commission according to the changes in value of the underlying currencies. The ECU is composed of a weighted mean of all member currencies of the European Monetary System. Since the ECU changes its balance to reflect changes in exchange rates and interest rates between these currencies, the ECU tends to limit exchange rate risk and interest rate risks. Although called an annuity, Swiss Plus acts more like a savings account than a deferred annuity. But it is operated under an insurance company's umbrella, so that it conforms to the IRS' definition of an annuity, and as such, compounds tax-free until it is liquidated or converted into an income annuity later on. Swiss Plus accounts earn approximately the same return as long-term government bonds in the same currency the account is denominated in (European Community bonds in the case of the ECU), less a half- percent management fee. Interest and dividend income are guaranteed by a Swiss insurance company. Swiss government regulations protect investors against either under-performance or overcharging. Swiss Plus offers instant liquidity, a rarity in annuities. All capital, plus all accumulated interest and dividends, can be freely accessible after the first year. During the first year 100% of the principal is freely accessible, less a SFr 500 fee, and loss of the interest. So if all funds are needed quickly, either for an emergency or for another investment, there is no "lock-in" period as there is with most American annuities. Upon maturity of the account, the investor can choose between a lump sum payout (paying capital gains tax on accumulated earnings only), rolling the funds into an income annuity (paying capital gains taxes only as future income payments are received, and then only on the portion representing accumulated earnings), or extend the scheduled term by giving notice in advance of the originally scheduled date (and continue to defer tax on accumulated earnings). Protection Of Assets In Swiss Annuities From Lawsuits Growing the wealth is important, but so is protecting it from false claimants, and Switzerland excels at this. Almost anybody with wealth in the U. S. is at risk, as discussed in the early sections of this report. With everything that can happen to savings, it is nice to know that there is something, somewhere, nobody can touch. According to Swiss law, insurance policies -- including annuity contracts -- cannot be seized by creditors. They also cannot be included in a Swiss bankruptcy procedure. Even if an American court expressly orders the seizure of a Swiss annuity account or its inclusion in a bankruptcy estate, the account will not be seized by Swiss authorities, provided that it has been structured the right way. There are two requirements: A U. S. resident who buys a life insurance policy from a Swiss insurance company must designate his or her spouse or descendants, or a third party (if done so irrevocably) as beneficiaries. Also, to avoid suspicion of making a fraudulent conveyance to avoid a specific judgment, under Swiss law, the person must have purchased the policy or designated the beneficiaries not less than six months before any bankruptcy decree or collection process. The policyholder can also protect the policy by converting a designation of spouse or children into an irrevocable designation when he becomes aware of the fact that his creditors will seize his assets and that a court might compel him to repatriate the funds in the insurance policy. If he is subsequently ordered to revoke the designation of the beneficiary and to liquidate the policy he will not be able to do so as the insurance company will not accept his instructions because of the irrevocable designation of the beneficiaries. Article 81 of the Swiss insurance law provides that if a policyholder has made a revocable designation of spouse or children as beneficiaries, they automatically become policyholders and acquire all rights if the policyholder is declared bankrupt. In such a case the original policyholder therefore automatically loses control over the policy and also his right to demand the liquidation of the policy and the repatriation of funds. A court therefore cannot compel the policyholder to liquidate the policy or otherwise repatriate his funds. If the spouse or children notify the insurance company of the bankruptcy, the insurance company will note that in its records. Even if the original policyholder sends instructions because a court has ordered him to do so, the insurance company will ignore those instructions. It is important that the company be notified promptly of the bankruptcy, so that they do not inadvertently follow the original policyholder's instructions because they weren't told of the bankruptcy. If the policyholder has designated his spouse or his children as beneficiaries of the insurance policy, the insurance policy is protected from his creditors regardless of whether the designation is revocable or irrevocable. The policyholder may therefore designate his spouse or children as beneficiaries on a revocable basis and revoke this designation before the policy expires if at such time there is no threat from any creditors. These laws are part of fundamental Swiss law. They were not created to make Switzerland an asset protection haven. There is a current fad of various offshore islands passing special legislation allowing the creation of asset protection trusts for foreigners. Since they are not part of the fundamental legal structure of the country concerned, local legislators really don't care if they work or not. And since most of these trusts are simply used as a convenient legal title to assets that are left in the U.S., such as brokerage accounts, houses, or office buildings, it is very easy for an American court to simply call the trust a sham to defraud creditors and ignore its legal title -- seizing the assets that are within the physical jurisdiction of the court. Such flimsy structures, providing only a thin legal screen to the title to American property, are quite different from real assets being solely under the control of a rock-solid insurance company in a major industrialized country. A defendant trying to convince an American court that his local brokerage account is really owned by a trust represented by a brass-plate under a palm tree on a faraway island is not likely to be successful -- more likely the court will simply seize the asset. But with the Swiss annuity, the insurance policy is not being protected by the Swiss courts and government because of any especial concern for the American investor, but because the principle of protection of insurance policies is a fundamental part of Swiss law -- for the protection of the Swiss themselves. Insurance is for the family, not something to be taken by creditors or other claimants. No Swiss lawyer would even waste his time bringing such a case. Swiss Income Annuities Can Be Tailor-Made The main purpose of an annuity is to provide you with a constant income for as long as you live. But people's needs and circumstances differ, and to accommodate them a variety of beneficiary options is available for both single and joint annuities. In weighing the merits of the different annuity plans, several factors come into play. Whether you are male or female, how old you and your spouse will be when your life income begins, and the size of your deposit -- all these have a bearing,a s well as the kind of beneficiary option you want. Your age plays a crucial role in these considerations. The older you are, the more income difference there will be between an annuity without refund and one with any of the beneficiary options. If you can take out such an annuity at age 55, the difference in life income created under each option is not that much, because at age 55 the life expectancy for both males and females exceeds 25 years. According to statistics, therefor, the insurance company will probably have to pay out the entire amount regardless of what option the contract includes. The older you are, however, the more relevant the option becomes: whether the contract expires at death with no further payments (without refund) or whether some or all of the unused portion is refunded to a beneficiary (10 years certain, with refund). The life income will accordingly vary greatly. Choosing among the various beneficiary options requires you to ask yourself a few questions. For example, is there anyone whose well-being depends on your financial support? If there is indeed someone such as a spouse, then you should consider a plan that provides for that person (or persons, if children are involved) after your death. In the case of a spouse, this might involve one of the following options: 10 years certain, with refund; a joint annuity; or perhaps a single annuity for your spouse as well as for you. If you have no immediate dependent (or would leave no survivor who would be in hardship without you) and you are over 65, you may do best with a straight-life annuity paying the highest income for as long as you live. This means that after your death the insurance company stops all payments. This option offers the highest life income per franc of premium deposit -- regardless of whether you life one day or 30 years after the annuity is taken out. But the price you pay is that your beneficiaries get nothing. To provide for beneficiaries, annuities are available "with refund," or for "10, 15 (or any number) years certain." Let's look at these options. "With refund" simply means that at death, the unused portion of the premium paid is refunded to the beneficiary in a lump sum. The payment is determined by subtracting from the original premium the amount of guaranteed income paid out. "Ten years certain" means the income is paid for a minimum of 10 years. In other words, should you die after receiving only two payments, your beneficiary will receive the income for a further eight years. The principle is the same for a joint annuity; if the second person dies after only two annuity payments, the beneficiary will receive the remaining eight. Of course, in either case, the income is guaranteed for the life of the insured parties. An advantageous "bank account" with your Swiss insurance company Most international investors finance these programs by single deposits. Many have chosen to dollar-cost-average into these investments by making annual deposits and many arrange for these payments through a Swiss bank account. However, you don't have to have one to pay your insurance premiums. In fact, such an account would be reportable under U.S. laws, thus removing one of the advantages of Swiss insurance. Instead, there is another way to make your premium payments through a premium deposit account. This method has so many advantages, it is surprising that so few people know about it. In effect, a premium deposit account is an interest- bearing "bank" account opened at your insurance company. It has two distinct advantages over a regular Swiss bank account. First, it is not reportable to the tax authorities because you are making payments to an insurance company, not a bank. Second, it pays interest rates about 1% higher than bank deposit (savings) accounts. Moreover, there is no withholding tax on the interest; all payments are tax free. On the other hand, you cannot buy gold, securities, or anything else with this account. It can only be an interest-bearing Swiss franc account designed to make automatic premium payments. when the annual premium is due, it is simply debited from your account. You can predeposit as much as you want to your account (the minimum deposit is SFr100). Simply send the funds to your insurance company and use your policy number as you would your bank account number. By the way, as with a bank account, you'll receive an annual statement of your premium deposit account. One final point. Since insurance companies make surcharges of 2%, 3%, and 5% for semi-annual, quarterly and monthly premium payments respectively, you should simply stick with annual payments and use your premium deposit account for small deposits during the year, whenever you feel the exchange rate is particularly favorable or if you simply have extra cash available. U.S. Tax Treatment of Swiss Annuities The estate tax implications of annuities will depend on which beneficiary option the contract includes. As far as taxes on the income payments are concerned, the calculations are based on the amount of life income received each year. The lion's share of this income is tax free. Let's get a picture of how much is beyond the grasp of the tax man. The IRS divides the total premium payment by the number of years theoretically left to you, based on life expectancy tables for your age at the time you start receiving payments. Let's say a 65-year-old man, expected to live 15 years, purchases a $10,000 Swiss annuity. This premium payment divided by 15 years equals $666.67 per year. This is the non-taxable part. While the life income from this annuity is a fixed amount in Swiss francs, the dollar income he receives each year will fluctuate. Let's say he actually received $850 during the first year. Only the difference, $850 minus $666.67 or $183.33, is taxable as ordinary income. If he receives, say, $950 during the second year,he'll pay tax on $283.33. Thus, any profits resulting from currency appreciation are taxed as ordinary income in the year they are received. (Likewise, any currency depreciation can be claimed as a loss.) If the annuitant lives beyond his life expectancy, all payments received after this period elapses are taxed as ordinary income. Referring to the foregoing example, if our 65-year-old annuitant, expected to live a further 15 years, actually dies at, say,age 85, the last five years of his life income will be taxed as ordinary income. On the other hand, should he die earlier than expected, the unrecovered portion of his premium is deductible on his final income tax return. It is your responsibility to report earnings to your government. No Swiss company or office reports anything -- not the purchase of a policy or the opening of an account, nor payments, nor currency profits. It is solely up to you. The IRS recently ruled that a U.S. taxpayer can swap an annuity issued by a U.S. insurer for one issued by a foreign insurer that does not engage in business in the United States. The exchange is tax free when all the requirements for Section 1035 are met. The IRS says that there is no requirement that both insurance contracts be issued by U.S. insurers for the exchange to be tax free. (Letter Ruling 9319024).