PER: An annuity or a lump-sum payment—which should you choose?
As of October 1, 2019, the Retirement Savings Plan (PER) has replaced other individual and group retirement savings products. The PER comes in three forms: an individual PER (PERI or PERIN), a group company PER (PEREC), and a mandatory company PER (PERO).
According to France Assureurs (formerly the French Insurance Federation), as of the end of June 2022, PER plans had nearly 3.4 million policyholders, and assets under management totaled more than 41.4 billion euros. Contributions to insurance-based PERs totaled 577 million euros (up 16% from June 2021), and 326 million euros were transferred from older policies to PERs.
The choice between an annuity and a lump-sum payment depends on various factors, such as the plan holder’s preferences and needs, as well as the nature of the contributions made. Under a Mandatory Corporate Retirement Savings Plan (PERO), mandatory contributions can only be withdrawn in the form of an annuity. Wealth management specialists consider the annuity to be better suited for a retirement product because it supplements monthly income and is paid out until the individual’s death.
However, you must have accumulated sufficient capital for the annuity to be meaningful. If the monthly payment does not exceed 100 euros, an insurer may, with the policyholder’s consent, convert the annuity into a lump sum. It is estimated that you must have invested more than 100,000 euros to receive a monthly annuity of 300 euros. Otherwise, it is advisable to opt for a lump-sum payout.
The tax treatment of the PER is less favorable for a lump-sum withdrawal at maturity. The tax treatment depends on the option chosen by the plan holder upon enrollment and upon withdrawal at retirement. When filing their income tax return, the plan holder may deduct the amounts contributed to their PER from their total net income. They have two options: deduct 10% of their earned income, up to a limit of 8 times the annual Social Security ceiling (32,908 euros for contributions made in 2022), or deduct 10% of the annual Social Security ceiling (4,113 euros in 2022). If the account holder has opted to deduct the amounts contributed and then to receive a lump-sum payout upon retirement, they must be taxed on these amounts when they are paid out by the fund manager.
The portion of the capital corresponding to the payments is taxed according to the progressive income tax scale, without applying the 10% deduction. If the lump-sum withdrawal is substantial, there is a risk that the account holder will move into a higher marginal tax bracket and face a high tax rate (45% on amounts exceeding 160,336 euros in 2022). It is therefore in the account holder’s best interest to spread out the lump-sum withdrawals over time.
There are intermediate options that depend on the saver’s personal circumstances. PER account holders have the option of choosing a hybrid solution, in which they receive a lump sum upon liquidation and leave a portion in the plan, where it continues to be invested and may result in the payment of an annuity.
Given the stakes and the relative complexity of these decisions, the legislature has stipulated that individuals must receive advice at every stage of the product’s life cycle, namely at the time of purchase, during a transfer, five years before the plan’s maturity, and at the time of maturity. This advice is essential for making informed decisions based on one’s needs and tax implications.
