Inherited annuities

[Davey]

As my father passed away last year, my brother and I will receive inheritance annuities. I have 2 options, one is to choose to receive a certain amount each period (with a minimum of 20 years) or to receive the money at once (which will only be around 40percent of the money). Does anyone have any experience of receiving this, especially those who are living in Japan and received it from their home country?

 

[johnnyG]

A few people who post on this reddit sub are really good, so ask there:

Reddit - Dive into anything

www.reddit.com

Probably not with the choice, but about possible tax angles to one or the other.

Another idea would be the RetireJapan forum, smaller, but who knows:

RetireJapan - Index page

 

[Davey]

Thank you @johnnyG I will have a look over there as well.

 

[JPeters]

First off, may your father rest in peace!

Next, a question jumps out, but also may be heading into privacy issues, so forgive me for asking.

Is that 40% only for a one-off payment normal in the state or nation where your father lived, that has control over such matters?

I sure don't have any legal expertise in such matters, but it seems really weird. Where does that 60% go? Well that is another loaded question and maybe neither should be answered so we don't head into private matters at your end. But my goodness, 60% is one heck of a cut for some entity!

 

[johnnyG]

First off, may your father rest in peace!

Next, a question jumps out, but also may be heading into privacy issues, so forgive me for asking.

Is that 40% only for a one-off payment normal in the state or nation where your father lived, that has control over such matters?

I sure don't have any legal expertise in such matters, but it seems really weird. Where does that 60% go? Well that is another loaded question and maybe neither should be answered so we don't head into private matters at your end. But my goodness, 60% is one heck of a cut for some entity!

The 60% hasn't gone anywhere.

For round numbers, assume the supposed 'full value' is $10,000, and so vs the long term payments, the immediate worth would be $4,000 (=40%).

Plug $4,000 into a compounding calculator at 5%/yr, and after 20yrs you'll have a little over $10,000 ($10,613). The insurance company that sold the annuity is betting that they can make more than 5%yr on the money, and they'll pay the beneficiary a set amount each year, and keep the rest (which is their business model).

The long term return in the stock market is more like 7%, and at that rate, $4,000 becomes $15,478 after 20 years. This would be more than enough to pay a client 5%/yr, (totaling $10,000 at the end) and still make some profit.

That's the game, the business. The client gets a guaranteed payment over a set term (no risk), and the insurance company assumes the risk (and variation in returns over the years), and of course hopes that they will come out with some profit in the end. Usually, large insurance companies are safe in terms of risk, but there is a small chance of them going bankrupt--in which case the payments would stop (so one aspect of the choice is--is the insurance company solid financially).

So the choice is (a) take the $4,000 now and invest it, taking on the investment risk on your own, or (b) let the insurance company take the risk for a slightly lower total payout.

There are tax considerations for either choice--initial tax on the lump sum vs ongoing tax on yearly payments. Possible taxes on investment returns if you do it on your own. Also, maybe there is a high-interest debt that could be paid off immediately with the lump sum, which is also a kind of guaranteed return. Inflation would effectively shrink the yearly payments by, you guessed it--the rate of inflation. At 2% inflation, in year 20 you'd need about $1500 to get the same 'value' as $1000 in year 1.

Lots of things to consider and wonder about.

 

[Majestic]

In general, if you have an asset with the potential value of $10,000, you would never take a 60% haircut just to get your hands on $4,000 cash now. That is what the insurance/investment company would like you to do, because then they pocket the remaining $6000 and they are done with you. Great deal for them.

It is only a deal worth thinking about if there is a serious risk of hyperinflation (the $4000 will buy you 2 ounces of gold today, but next month it might only buy 1 ounce, or half an ounce). Or, if you only have a year to live, and the future payouts are of no use to you, then you might decide to take the cash now. OR, as Johnny says, if you are currently paying off a debt with high interest, it might be better to take the cash now and retire your high-interest debt - but you would have to be cautious the one-time lump sum payment doesn't propel you into a higher tax bracket, which would cause you a bit of pain this year, and next year too when you have to pay residents tax calculated on this year's income.

But my feeling is that you'll probably be better off taxwise and investmentwise if you forgo the lump-sum payout, and take the 20-year term payments EVEN when you consider the rather high inflation rate at the moment. If you can be disciplined and take the money from each payment and buy some other asset with it (stocks that pay dividends, or some mixture of investments), you'll be doing very well.

In Johnny's example above, if you take the lump sum of $4000 now and put it into an index fund that generates a return of about 7% a year, and don't touch it for 20 years, you will end up with about $15,000 (actually I calculate $14,466... so maybe someone can check the math). Whereas if you take a $500 payment each year for 20 years (total of $10,000 cash payout), and each year you put that $500 dollars into the same index fund, you will end up with over $20,000 in 20 years.

I am ignoring the obviously dodgy tax avoidance angles and shady deals like parking it into bitcoin and not telling anyone. Just dealing with it normally, legally, you are probably better off with the regular payouts rather than the lump-sum.