Guest columnist Bruce Grantier.
As a former managing director of a bank involved in the management of their pension funds, I have been asked to write as a guest columnist on the Charitable Gift Annuities (CGA) program offered by Catholic Missions In Canada. In this article, I will discuss the main determinants of CGA yields; the process of annuity pricing; and some advantages of purchasing CGAs.
Annuity Yields by Age Single Male and Female 4% Bond Yield
The three main determinants of CGA yield are age, bond market yields, and gender. Age is the most important determinant, with yield increasing roughly 5 per cent between the ages of 60 and 90. (See Table 1.) expectancy, the shorter the period over which the amount of the annuity is amortized and hence, the higher the yield. Gender is the second determinant of yield.
It is well known that females have longer life expectancy than males. Female annuitants with longer actuarial life expectancies receive fixed payments over a longer period, relying more on investment income and less on return of their capital. Finally, the yield paid on the CGA is a combination of a return of capital plus the investment CGAs are priced to pay a fixed rate over the actuarially expected life of the annuitant. As such, the older the annuitant, the shorter their life return. CGAs use the “long
Catholic Missions In Canada belongs to the Canadian Charitable A n n u i t y A s s o c i a t i o n (http://www.charitableannuities.org) and uses the industry's accredited methodology to price annuities. Annuity quotes can be produced for single or joint annuities, for different ages or genders, at different bond market yields, and for different amounts. The program uses actuarial accepted life insurance tables, employing conservative assumptions about life expectancy.
Of interest to many, are the varying tax rates on annuities. While all annuitants receive an immediate tax receipt (at least 20 percent of the CGA), the amount of the charitable receipt goes up, depending on the age of the annuitant at the time the annuity is established. Older annuitants receive payments which largely (or entirely) consist of the return of capital, which is largely (or entirely) tax free. Younger annuitants receive a combination of investment income (taxable) plus return of capital (non-taxable).
Finally, the underlying investments for our CGA Program are managed by four specialist investment managers to provide good returns, while an annual actuarial evaluation of the annuity portfolio is done by Mercer, with our financial statements audited by Deloitte.
As a governor of this wonderful organization I am unquestionably biased in favour of CMIC's CGA program. However, I also firmly believe that the CGA is attractive to a donor from two perspectives: financial and religious.
The financial attraction of the CGA comes in the form of high fixed rate yields higher than most current dividend or bond yields. They also have tax advantages—with an immediate receipt upon purchase and in the favourable tax treatment of annual payments. Finally, our annuity process is secure, maintaining a sustainable and conservatively managed portfolio of investments.
The religious attraction comes in the support of the many valuable services to our faith community, which your CGA purchases make possible throughout
Reprinted from: Catholic Missions In Canada Highlights, July 2010