While it might be an unusual time to provide an explanation of Swiss annuities given what has been taking place of late with the Swiss franc and related decisions made by the Swiss National Bank, it still makes sense for any financial services consumer to understand potential benefits of these products.
A Swiss annuity is an annuity provided or “issued” by a Swiss insurance company. Swiss annuities come in several forms such as fixed immediate, fixed deferred and a form that allows the owner to direct independent investments. Swiss annuities are often—although not always—denominated in Swiss Francs.
Currency strength and asset protection are generally considered to be the main benefits of a Swiss annuity.
The Swiss franc has been a rock of stability in a world of price inflation and depreciating currencies. Inflation erodes purchasing power and is especially harmful to people (such as annuity owners) who receive fixed payments. In contrast, a strong and stable currency preserves and even enhances purchasing power.
Consider, for example, the following chart that shows the appreciation of the Swiss franc relative to the US dollar since January 1, 1999.
Or look at the chart below which represents the franc-dollar relationship in terms of US dollar depreciation.
On the asset protection front, Swiss annuities (and life insurance policies) are protected from creditors who may to pursue an individual’s assets through legal proceedings such as a bankruptcy or lawsuit.
There are certain rules that need to be followed with respect to beneficiary designations, but Swiss law does appear to provide annuity and life insurance policy owners with full protection from creditors as long as the transaction does not involve fraudulent conveyance.
Additional points to consider in light of Swiss annuities—some of which are related to currency stability and asset protection—include:
- The strict privacy laws that apply to Swiss banking also apply to insurance transactions.
- No Swiss insurance company has ever gone bankrupt.
- The Swiss insurance industry has very high (conservative) capital requirements.
- Swiss annuities have relatively low fees.
- Swiss annuities have attractive liquidity provisions.
- A US annuity or life insurance policy can be exchanged for a Swiss annuity or life insurance policy through a tax free Section 1035 exchange.
- Switzerland runs a budget surplus.
- Switzerland has not been involved in over 150 years.
- Switzerland’s constitutional right of referendum makes it a model of legislative stability.
- Switzerland has one of the highest per capita incomes in the world.
- Switzerland has the highest percentage of millionaires in the world.
- While the timing may be terrible, one Swiss company now offers “The Swiss Gold Annuity” which allows for the annuity’s assets to be spread among various gold investments.
Some of the downsides and related considerations include:
- Currency risk. Until the past couple of days, the Swiss franc has been on a tear. This consistent and rapid currency appreciation is a challenge for Swiss businesses and policy makers. The strength of the Swiss franc makes it difficult for Swiss businesses to maintain competitive pricing on exports. The recent decision by the Swiss central bank to impose a ceiling on the value of the franc is a testament to this difficulty.
- Interest earnings on Swiss annuities are taxable as ordinary income for US citizens.
- Swiss annuities present a large psychological hurdle. It is hard enough for most would-be annuity buyers to make the decision to hand over a portion of their life savings to an insurance company in their own country. Add the uncertainty of a foreign insurance company, foreign laws, foreign currency and foreign insurance broker to the mix, and the decision can understandably be overwhelming.