THE LIFE RETIREMENT
In simple terms, a life annuity is the current purchase of a property with a delayed subscription right. As the term suggests, the seller receives a monthly annuity for the rest of their life. In most cases, a one-off payment is also made when the contract is concluded, which reduces the monthly pension. The size of the one-off payment and the lifelong annuity can be agreed individually.
For investors with a long time horizon, this procedure may offer properties on special terms. Find out below how the process works and what you should bear in mind as a buyer.
Privately managed administration is the opposite of professional administration. If the above-mentioned issues are feasible for you, you can certainly take on the work yourself. This is because other issues such as maintenance and repairs to the property are manageable in terms of expenditure. However, assuming a rental income of CHF 30,000 and CHF 1,500 in management fees, the question arises as to whether this price does not justify your peace of mind.
Life annuity - RIGHTS AND OBLIGATIONS
With the life annuity model, rights and obligations are transferred to the buyer upon sale. This means that major investments must now be borne by the buyer. Housing costs and insurance are still borne by the seller. The seller has the right to live in the property for the rest of their life. To protect the partner, this right can also be extended to them. During this time, the buyer pays the agreed monthly pension payments. If the seller moves into a care home early, you can live in the house. However, the pension is still owed. A minimum duration for the annuity can also be agreed, whereby in the event of premature death, the annuity payments are transferred to the seller's descendants.
Life annuity - LOHNENSWERT?
The calculation of the one-off payment and the monthly pension is based on the life expectancy of the Swiss population. The higher the life expectancy for the other party, the lower the annuity and one-off payment. The life annuity can therefore also offer people with lower available funds the opportunity to purchase a property.
Whether the annuity is worthwhile as a buyer depends entirely on the available investment alternatives. It is important to bear in mind that the capital invested today is associated with considerable opportunity costs, depending on the duration of the annuity.
The following example serves as an illustration
Value of property today 1'000'000
Duration of the annuity 10 years
One-off payment 400,000
Pension/month 3,000
Total payment 860,000 (500,000 + 12*3,000*10)
Opportunity costs (assuming 5% annual interest rate)
One-off payment 251,557
Pensions paid 105,847
Future value of payments after 10 years
One-off payment 651,557 (400,000 + 251,557)
Pensions paid 465,847 (12*3,000*10 + 105,847)
Total 1'117'404
Assuming a possible annual interest rate of 5%, the property value must therefore increase by just under 11.7% over the term of the annuity for this model to be worthwhile. However, if the potential interest rate falls, the necessary increase in the value of the property will fluctuate greatly as a result of compound interest.
SELLER
The financial advantage of an annuity usually lies with the buyer. As a result, the seller's right of residence is included in the one-off payment and the monthly annuity. The buyer should be remunerated for this right of residence, which is associated with risk. For the seller, however, the life annuity is worthwhile if they wish to continue living in their property and cover their costs or incur additional expenses with the additional monthly income.
CONCLUSION
In conclusion, it can be said that the life annuity can be very worthwhile depending on the assumed and effective duration. It also offers great advantages for sellers, as they can continue to live in their property in old age and receive a monthly pension at the same time. From this perspective, it may well be possible to find an advantageous solution for sellers and buyers at the same time.