Is a life annuity really worthwhile?
The life annuity is one of those pension solutions often mentioned but rarely well understood. With the upcoming 2025 tax reform affecting the pillar 3b, interest in this guaranteed lifetime income option is rising again. Yet, as is often the case with personal finance, the answer to “is it worth it?” depends primarily on your individual situation, your life goals, and your risk tolerance.
If you're looking for stable financial security and are worried about seeing your savings melt away, a life annuity can prove to be valuable. On the other hand, if you have a good risk tolerance and want to prioritize the transfer of your assets, it might not be the best option. So, who is this solution really for?
Who are life annuities designed for?
The life annuity is not a one-size-fits-all solution. It is primarily intended for those who are looking for a secure way to protect themselves against longevity risk—that is, the risk of living longer than expected and running out of resources later in life.
Here are the profiles for which life annuities may be particularly relevant:
- Profile
- Objectives
- People with no direct heirs or no concern about passing on their assets
If passing on capital is not a priority for you, a life annuity allows you to fully consume your assets in the form of guaranteed income for life.
- Retirees or future retirees looking to secure a regular income
If you're worried about the uncertainty of the financial markets or the ups and downs of the economy, a life annuity provides reassuring stability, whatever the economic conditions.
- Healthy people with high life expectancy
The longer you live, the more profitable the annuity becomes. This is an advantageous option for those who anticipate a long and healthy retirement.
What are the advantages of life annuities?
Guaranteed income for life
Protection against financial market fluctuations
Unlike other forms of investment (stocks, investment funds, ETFs, etc.), a life annuity is not exposed to market volatility. You secure a portion of your assets and no longer have to worry about economic crises or stock market fluctuations.
Tax benefits
In 2024, life annuities were taxed at a flat rate of 40% as deemed income. Starting in 2025, the taxable portion is adjusted based on the maximum technical interest rate in effect at the time the contract is signed. For example, for contracts signed in 2024 with a technical interest rate of 1%, the taxable portion of the guaranteed benefits will be reduced to 1%. However, any excess benefits will still be taxed at a rate of 70%.
What are the disadvantages of life annuities?
Irrecoverable capital
By purchasing a life annuity, you convert a lump sum into income in an irreversible way. Once the contract is signed, you can no longer access that capital, even in the event of an unexpected need. Therefore, it is not well suited for individuals who want to maintain some level of liquidity or flexibility.
Often low yield
Over the long term, the return on a life annuity is generally much lower than that of a more dynamic investment (such as stocks, investment funds, or real estate). If you're comfortable managing your assets and can tolerate some level of risk, other solutions may offer a better overall return.
Unsuitable for inheritance purposes
A life annuity is primarily designed to gradually draw down your assets over your lifetime, not to preserve them for inheritance. While it is possible to include a capital transfer option, this typically comes at the cost of a significantly reduced annuity, making it a less attractive solution if your goal is to optimize estate planning.
Inflation risk
Unless indexation has been included, the amounts paid out by a life annuity remain fixed over time. As inflation rises, the purchasing power of those payments can gradually erode. This can become a concern if you experience a long retirement and your expenses increase.
Deferred annuity VS immediate annuity
The immediate annuity is lower than the deferred annuity because:
- With a deferred annuity, the insurer has 5 years to build up your capital before starting payments, resulting in a higher annual income.
- With an immediate annuity, you start receiving payments right away, so the annual income is logically lower.
Calculation example
- Profile
- Objectives
- Initial investment
You decide to invest CHF 100,000 to purchase a life annuity.
- Deductible expenses
Deduct stamp duty (tax on premiums for 2.5%), or CHF 2,500.
- Amount actually invested in the contract: CHF 97,500
- Annuity amount
- You receive approximately CHF 4'300 per year for life from your 65 years old.
If you are 65 and starting immediately (immediate annuity):
- You receive approximately CHF 3'900 per year for life from now.
Life annuity inheritance
A life annuity can include an option to ensure capital is passed on in the event of the insured’s death. This is known as a "life annuity with return of premiums." It means that if the insured passes away before receiving the full value of their initial capital, the remaining balance is paid to their heirs. Otherwise, if the full capital has been paid out, no further amount is due, and the insurance company retains the remaining funds.
At the time of subscription, it is also necessary to choose how many people are covered by the contract. In the case of a single-life annuity, the treatment of remaining capital upon death depends on the chosen option (with or without return of capital). If the return option is selected, any unused capital is passed on to the heirs; otherwise, it is retained by the insurer. In the case of a joint-life annuity, two individuals—typically a couple—are insured. If one of them passes away, the surviving spouse continues to receive the annuity until their own death.
These options are interesting, but they come at the expense of the annuity, which will be decreased based on the risk calculated by the insurer.
Immediate annuity or deferred annuity?
A life annuity offers the possibility of ensuring capital transfer in the event of the insured’s death. This is known as a "life annuity with return of premiums." It means that if the insured dies before having received the full value of their capital, the remaining balance is paid out to the heirs. Otherwise, the unused capital is retained by the insurance company, and the heirs receive nothing.
At the time of subscription, it is also necessary to choose how many people are covered by the contract. In the case of a single-life annuity, the treatment of remaining capital upon death depends on the chosen option (with or without return of capital). If the return option is selected, any unused capital is passed on to the heirs; otherwise, it is retained by the insurer. In the case of a joint-life annuity, two individuals—typically a couple—are insured. If one of them passes away, the surviving spouse continues to receive the annuity until their own death.
These options are interesting, but they come at the expense of the annuity, which will be decreased based on the risk calculated by the insurer.
Life annuity or annuity certain?
A fixed-term annuity is a pension solution that guarantees the payment of a regular income for a predefined period, typically between 5 and 25 years, depending on your choice. Unlike a life annuity, the payments are limited in duration and are still made even if the policyholder passes away during the term.
A fixed-term annuity allows you to define exactly how long you wish to receive payments (for example, from age 60 to 65 to bridge the gap before AVS). If you pass away during the payout period, the remaining annuity payments are made to your beneficiaries. In addition, the premium is not subject to the federal stamp duty of 2.5%.
Conclusion
There is no universal answer. A life annuity is neither inherently good nor bad. Everything depends on your financial situation, retirement goals, risk tolerance, and even your life expectancy after retirement.
It represents an excellent option for those who primarily seek the security of a guaranteed lifetime income, without having to worry about managing their capital or dealing with fluctuations in the financial markets. With the 2025 tax reform, its appeal is even stronger for profiles looking for favorable tax treatment. However, for those who wish to preserve and pass on their wealth, maintain flexibility, or aim for higher returns through other investments, a life annuity is less suitable.
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