TAX ASPECTS OF THE VARIABLE ANNUITY*

Abstract

SINCE WORLD WAR II the possibility of continual creeping inflation is perturbing ever larger numbers of people. The problems atising are nowhere greater than in the area of retirement planning. Because long-term dollar stability is being seriously questioned, because tommon-stock values-in terms of purchasing power-appear to be more stable over the long pull, the variable annuity has appeared. It utilizes equities in retirement programs by investing considerations in common stocks and by paying retirement benefits based on fluctuating stock values rather than on fixed dollar amounts. The variable annuity has appeal both as an inflation hedge and as a means of participation in the long-run economic growth of the country. Although the variable annuity noWv covers certain grotups, notably college professors and beneficiaries of some trusteed pension plans, it is not available to individuals. Neither is it written by insurance companies because of legal limitations on their investment policies. Some insurance companies are pushing for permission to sell variable annuity policies. Mutual funds oppose such sales on the basis of tax discrimination. An analysis of the possible tax discrimination against mutual funds, arising from the sale of variable annuity policies by insurance companies Is the basic task of this study. Analysis proceeds along two lines: (1) comparison of the after-tax retirement benefits of mutual funds' and of insurance underwritten variable annuities and (2) comparison of both plans in theit effects on government revenue. Specific consideration of after-tax benefits received from the variable annuity or the mutual fund necessitates three questions. First, what is the net cash benefit received from a completed retirement program under each approach to retirement? Generally speaking, the variable annuitant fares better. Differences in benefits become more favorable to the variable annuitant as higher, rather than lower, tax brackets are considered, and less favorable as higher, rather than lower, annual considerations are examined. The variable