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CCH® PENSION AND BENEFITS — 11/3/06

Pomeroy lifetime annuity bill lauded in ACCF study

An influential Washington, D.C.-based think tank gave its approval to a bill offered by House Ways and Means Rep. Earl Pomeroy (D-N.D.), that would create tax incentives for annuitizing retirement wealth.

In a study released October 12, 2006, the American Council for Capital Formation (ACCF) said that Pomeroy's legislation, The Lifetime Pension Annuity for You Bill (H.R. 2951), would provide a government subsidy in the form of a tax incentive to encourage the purchase of private annuities. The ACCF describes itself as a nonprofit, nonpartisan organization dedicated to the advocacy of tax and environmental policies that encourage saving and investment.

"As people live longer, their retirement savings have to stretch further," said Pomeroy. The ACCF study explained that people generally do not annuitize their wealth due to the high price of private annuities relative to other investment vehicles. "To counteract the negative effects of these insurance loads in the private annuity market, the government could subsidize the purchase of private annuities," said William Gentry of Williams College in Massachusetts and Casey Rothschild of Middlebury College in Vermont, who conducted the ACCF study.

Tax exemption would be provided

Rep. Pomeroy said that his legislation would encourage workers to annuitize part of their retirement savings by exempting from income taxes 25% of monthly payments from a qualified annuity. The maximum amount of the tax exemption, which is set at $5,000 each year per individual, would be indexed for inflation. The ACCF study found that the legislation would reduce the total cost of providing an annuity by as much as 8%. The bill would also increase the amount the average retiree household annuitizes by about $50,000 and reduce federal tax receipts by only 10-to-15 cents per $1.00 of additional annuitization. "One way of thinking about this proposal is that it increases the after-tax rate of return on annuitized wealth and, by annuitizing earlier in life, an investor can increase the time horizon over which the higher after-tax rate of return is earned," the study noted.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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