Buying on an annuity plan: how does it work?

What is an annuity?

A life annuity is an arrangement in which you sell your home to a buyer who does not pay the full purchase price upfront. The purchase price is divided into monthly payments that are made over a predetermined period. On average, this period is 20 years. If the seller dies before the end of this period, the life annuity is released, and the buyer is not required to pay the remaining amount. There are two options:

• Sale of freehold property: the new buyer gains immediate access to the home 

• Sale with right of usufruct: the seller continues to live in the home until his or her death 

Sales under a usufruct arrangement are particularly popular. This arrangement is especially appealing to people between the ages of 70 and 80. They are old enough to find buyers willing to enter into a life annuity agreement, while still being able to spend their retirement in their familiar home. At the same time, they receive a nice monthly sum to live on. There are no rules regarding who can sell under an annuity arrangement, but this arrangement is much less appealing to younger sellers.

How is the amount of the annuity determined?

In a life annuity arrangement, the sale proceeds from the home are split into two parts. First, a so-called “bouquet” is paid. This is an initial down payment, followed by periodic payments. The amount of the bouquet can be determined by mutual agreement. This, in turn, affects the amount of the periodic payments. Other factors that come into play include:

• The value of the home

• The seller's age and gender

• The number of sellers

• The duration of the contract

• Sale of full ownership or usufruct

• Indexation of the annuity

The pros and cons for the seller

Annuity terms can be advantageous in some cases, but there are also drawbacks you should consider if you want to sell your home under an annuity arrangement. These are the main pros and cons for the seller.

Benefits of selling on an annuity basis

The biggest advantage of selling under an annuity arrangement is that you enjoy a stable income that is also indexed. This means your purchasing power remains the same, and you benefit from a financial bonus. At the same time, you can continue to live in the comfort of your own home. Furthermore, the annuity is not subject to tax, as it is not considered income by the tax authorities. Your taxable income therefore does not increase, while you still enjoy a stable income.

Disadvantages of selling under an annuity arrangement

Those who sell their home in old age through an annuity primarily enjoy the benefits, but there are a few minor drawbacks. For example, you will be living in a home that you no longer technically own and therefore cannot pass on to the next generation. If you agreed on an end date in the annuity terms and you are still alive on that date, you will no longer receive annuity payments from that point on. Your stable income will therefore cease. Additionally, there is a small risk that the buyer will stop paying the annuity.

The pros and cons for the buyer

For the buyer, purchasing a life annuity is a slightly bigger gamble. While there are significant advantages, the disadvantages should not be overlooked either. These are the main pros and cons for the buyer.

Benefits of buying through an annuity

A life annuity purchase is also often viewed as a speculative contract. This means you have the potential to end up paying significantly less than the property’s appraised value. If the seller passes away before the contract’s expiration date, the outstanding annuity payments are forfeited, and you benefit from a financial windfall. Additionally, you do not have to pay the entire purchase price in a single lump sum. Buying on an annuity basis is therefore a good way to invest in real estate without having a lot of capital or having to take out a loan.

Disadvantages of buying on an annuity plan

While there is the potential for significant financial windfalls, there is also the risk of setbacks. If the annuity term has expired and the seller is still alive, he or she may continue to live in the home, even though you have already paid off the property in full. Furthermore, you are not entitled to a tax deduction and do not know when you will gain possession of the purchased home. This makes buying on an annuity an uncertain investment.