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foreign held annuities Old Zurich

Foreign Held Annuities – Bringin’ Em Back

Foreign held annuities are increasingly coming to my attention as more and more boomers edge into retirement…

I am guessing, from the conversations with annuity owners, that at some point in the 1980s (after gold had already peaked interestingly) inflation fears motivated scores of Americans to buy foreign (particularly “safe” Swiss) denominated assets.

I am not old enough but like many situations, I think you would have had to live through the 1970s to understand the effects of inflation on living expenses. And on the psyche of Americans. Paul Volcker as Chairman of the Federal Reserve, had led the bank on a series of rate hikes in the early 1980s.

Short term rates topping 14+% were enough to break the back of inflationary pressures. But even as the stock market began to rally in 1982, many didn’t realize that a new era had begun. So throughout the late 1970s and early 1980s, gold and foreign currencies were being recommended (likely by questionable characters) as the way to go.

Foreign Held Annuities

Even today, you can find all kinds of people on the web touting foreign currencies, gold, silver and more to save people from the inflationary bonfire coming from excessive Fed stimulus and low interest rates.

Personally, I do think that currently precious metals present an opportunity. An opportunity to protect oneself from global central bank money supply increases and negative interest rates. But some of these marketers have been saying that for 40 years – and they were not always correct, or timely. But that’s a topic for a different article!

Here I want to cover one of the other historic bastions of fiscal safety – Switzerland. Unfortunately it’s been a while since the Swiss Franc was a true safe haven. Maybe that’s part of the reason more money is coming back to the US (more on that below). But at one time, the franc was a bedrock currency in global finance.

If you want to combine safety with tax deferral, what can you do? An annuity of course. And of course you’d pick the Swiss Franc in the early 1980s (often enough) or other foreign held annuities. It also helps avoid paying local income tax. Investors were hoping to earn interest AND protect from inflation. And furthermore, to profit from an expected rise in the Franc vs the Dollar.

What Really Happened

Over the years, Volcker tackled inflation, costs came down and real (debt fueled) growth returned to the US. US rates on deposit instruments like CDs and on bonds were acceptable throughout the 1980s. Even into the 1990s an investor could earn a fair rate of return on bonds.

The advantage to owning foreign held annuities and other assets diminished going into the year 2000. However, for years after the 2000 crash, the Franc and the Euro were particularly strong as far as currencies go. The Swiss Franc went as far as to run up through the 2008 crash into 2012 – see chart:

Swiss Franc from 2008 to 2012

However, with European growth sluggish to non-existent after the 2008 crash, European Central Bank officials moved to an aggressive monetary policy. They lowered ECB rates to zero and bought not only government debt of various Euro countries but also corporate debt. The National Bank was “forced” to follow as Europeans sent their cash to Switzerland, in the hopes of earning positive interest on their savings.

Swiss Go Negative

The Swiss eventually set their rates negative to dissuade people from sending their money to Switzerland. Moreover, they wanted their currency not to be a headwind to trade.

This has put us where we are now. With the Franc fairly level with the dollar since mid 2014.

foreign held annuities - USD Swiss Franc cross last 5 years
USD/CHF Since 2014

US Increases Reporting Requirements of Foreign Held Annuities and Other Assets

With the increased focus on terrorism funding and ways to stop it (and previously drug money before that), The US has implemented a number of financial disclosure requirements over the past 40 or so years. The Bank Secrecy Act (1970), The USA Patriot Act and others like it force not only investors to disclose their overseas holdings, but add onerous enough reporting requirements to foreign banks.

These requirements are so overbearing that most banks, especially Swiss ones (where secret Swiss bank accounts are infamous) have decided that it’s not worth it to have American customers unless they are high net worth. And most have asked US clients to take their business elsewhere.

This has motivated Swiss financial institutions to ditch smaller US accounts. Accounts such as in this case, annuities – held by Americans in Swiss insurers. US clients are getting letters telling them to move their funds. Some are asked and some are required to.

And this, more than other reasons is forcing funds back. Though admittedly low rates can be dangerous for Swiss insurers. And the currency isn’t exactly rising vis a vis the dollar. So for many reasons it makes sense to drag the funds back.

Foreign Held Annuities – How to Bring Em Back

Many may not realize this but you can transfer the funds back to an American insurance company tax deferred under Section 1035.

This process is not as complicated as it may sound. It involves:

  • Opening an account at a US insurer.
  • Completing their paperwork along with a transfer form outlining the 1035 exchange details. This includes where the funds are coming from, account number etc.
  • Checking for any requirements of the foreign annuity company sending the funds.
  • Allow the new insurer to request the funds and transfer. If you touch the funds you ruin the 1035 rules. Follow the rules.
  • Make sure they transfer COST BASIS information!

Conclusion

Having done this multiple times now, I can see the trend. And until the rules change, it proves much simpler to bring those funds back to the USA.

Of course don’t forget the process of choosing a suitable annuity destination! You have many choices: fixed annuity, fixed index annuity. variable annuity and immediate annuity. Which one makes sense for you? If you prefer having solid information, Chris’ Annuity Guide might help here. And if you want to review planning options, Planning with Chris may make sense too.

In the meantime, if you have any comments, drop them below. For more resources check out Chris’ video and the annuity-related articles below!

Cover image courtesy of Artur Staszewski