Single Premium Annuity Taxation

Abstract

Single-premium annuity policies are contracts whereby the insurer makes regular payments for a specified period or during the insured life in exchange for a lump-sum payment from the insured. It is almost impossible for individuals, without the motivation to leave an inheritance, to distribute their savings accurately over their remaining lifespan in order to maintain regular consumption. Life annuity insurance easily and accurately solves this distribution problem. Life annuity policies essentially transfer the risk of longevity to the insurer based on the insured's resources, and the insurer distributes this risk among the insured parties it has brought together. Through life annuity, the income of those who live longer than expected is paid from the principal amounts that insured individuals who die earlier than expected cannot recover. Taxation rules are established based on the composition of annuity. Annuities contain three elements: principal, return, and "balancing element". Commonly, the amount exceeding the total premium paid by the insured, i.e., the return portion, is subject to income tax. In practice, the "balancing element" is considered as income and is taxed accordingly. In Turkey, at least 10 years or life annuities are exempt from income tax. However, if the system is exited before the end of this period, a low, flat-rate tax is applied to the annuity payments through withholding tax. If savings that receive the highest level of support from life insurance and private pensison sysytem are transferred to an annual at least 10 years or for life annuity, both annuity earned during this transfer process and 10 years or life annuity are exempt from tax. However, exiting the system before the end of the specified period means that the conditions of the dual exemption have been violated. A low, flat-rate tax is applied to the return payments from the annual income insurance policy through withholding tax; and a higher, but still low, flat-rate tax is applied to the return payments not taxed during the transfer process through withholding tax. The additional tax burden arising from the transfer process due to the breach of the condition is considered arbitrary, at least in terms of its level, as it is not determined based on financial capacity, economic loss of tax, or loss of tax, i.e., damage to the treasury.