In this study, David Babbel shows how to measure the size of tax benefit arising from the purchase of fixed annuities – both deferred and immediate. They demonstrate how the size of tax benefit available from tax deferral depends on five factors:
- The length of time the annuity is held during the accumulation and decumulation phases of ownership;
- Whether a deferred annuity is annuitized (either by conversion or by a 1035 exchange) at the end of the surrender period, or taken as a lump sum distribution;
- The level of yields;
- Tax rates on ordinary income; and
- The differential between tax rates on ordinary income and tax-preferred treatment of dividends and capital gains.
They also provide a set of formulae that can be used to estimate the size of tax benefit arising from tax deferral under varied scenarios.