Analysis of the New 2023 ACGA Annuity Rates

On November 23, 2022, the American Council on Gift Annuities announced that it would be increasing its suggested maximum annuity rates, effective January 1, 2023 (the “new rates”). We now know the details of the new rates, which the ACGA made public on December 19, 2022. The new rates replace the rates that became effective July 1, 2022 (the “current rates”). The ACGA’s decision to increase its suggested maximum gift annuity rates was triggered by the sharp rise in interest rates that started in March and has continued since July. 

The new suggested maximum rates are moderately higher than the ones they replace. For typical annuitant ages, 70 and older, the new single-life rates are 0.6% - 0.7% higher than the rates they replace and are capped at 9.7%, up from 9.1%. Two-life annuity rates are 0.4% - 0.8% higher at typical joint ages, culminating in a cap of 9.5%, up from 8.8%.

The new rates were set with the usual goals that 50% of the funding amount remain for the charity on average and that this residuum have at least a 20% present value. The new rates for immediate payment annuities ensure a contribution value at all ages of at least 10% of the funding amount down to July’s IRS discount rate of 3.6%. The 20% present value goal causes the maximum rates suggested for ages 59 and younger to be lower than they otherwise would be.

ACGA Suggested Annuity Rates, Effective January 1, 2023

Assumptions Underlying the New Annuity Rates

The ACGA has made the assumptions listed below in determining the schedule of suggested maximum annuity rates that will go into effect on 1/1/2023. Items 3, 6, and 7 differ from the assumptions used to determine the rates that went into effect on 7/1/2022.

1. The residuum realized by the charity upon termination of an annuity is 50% of the gift amount.
2. The present value of the residuum must be at least 20% of the gift amount.
3. Each rate must result in a contribution value of at least 10% down to an IRS discount rate of 3.6% (up from 3.0%).
4. The suggested rates use the 2012 IAR Mortality Table, which incorporates projections for increasing life expectancies (improvements in mortality). Annuitants are assumed to be 55% female and 45% male.
5. Annual expenses for investment and administration are 1.0% of the fair market value of gift annuity reserves.
6. The total annual return on gift annuity reserves net of 1% assumed annual expenses, is 4.25% percent (up from 3.5%).
7. The rates for the oldest ages (81 and above) are somewhat lower than the rates that would follow from the first six assumptions. One-life rates are capped at 9.7% for ages 90 and above (up from 9.1%) and the rates for ages 81 to 89 are graduated downward from that cap.

Samples of Increased Annuity Rates

The figures in the table below show how the new rates and resulting charitable deductions for a $10,000 immediate payment gift annuity will differ from the current rates and deductions over a range of common annuitant ages. The July deductions are based on July’s IRS discount rate of 3.6% and the January deductions are based on December’s IRS discount rate of 5.2%. The 2000CM mortality table was used in all cases.

Comparison of New and Old ACGA Rates

You can see that the deductions available in January 2023 will be higher than they were in July 2022 through at least age 75, despite the higher ACGA rates. As an influence on the deduction, the recent spike in the IRS discount rate outweighs the increase in ACGA rates until the annuitant is fairly old. Note, however, that the recent spike in the IRS discount rate has also reduced the total tax-free portion of annuity payments by the same amount as it has increased the deduction.

Deferred Gift Annuity Rates Will Increase More Than Immediate Annuity Rates

The ACGA has increased the compound interest factor for deferred gift annuity (DGA) rates from 3.50% to 4.25% for all deferral periods. As a result, the longer the deferral period, the greater will be the difference between the old DGA rates and the new ones.

The figures in the table below show how the ACGA suggested rate for a DGA will change as the deferral period changes under the new schedule. The annuity amounts are based on a $10,000 gift.

Current DGA Rates vs. New DGA Rates

Because December’s 5.2% IRS discount rate is greater than the ACGA’s 4.25% deferred interest factor, deferred annuities that follow the ACGA rates should always have a charitable value over the required 10%. Should you encounter a DGA that fails the 10% requirement, PGM Anywhere and PGM desktop can decrease the annuity rate for you, as needed, to meet this requirement. Be sure to disclose the reduction to your donor in this case.

Using the New ACGA Rates in PGM Anywhere, Planned Giving Manager, and GiftCalcs

We updated PGM Anywhere with the new ACGA rates for all clients on December 19. We released an update of Planned Giving Manager (PGM 7.6A desktop) with the new ACGA rates the same day.

If your PGM Anywhere account is configured to set default annuity rates using the ACGA rate table effective on the date of gift (the default configuration), it will continue to use the ACGA rate table that went into effect on 7/1/2022 to set default annuity rates for gift dates through 12/31/2022. It will use the ACGA rate table that goes into effect on 1/1/2023 for gift dates of 1/1/2023 onward. The same holds true for PGM desktop once you update it to PGM 7.6A or any later version. If PGM Anywhere or PGM desktop is configured to use a specific ACGA rate table or a custom rate table, then it will continue to use that table for setting default gift annuity rates regardless of the gift date.

We have also updated GiftCalcs, our calculator for planned giving websites, with the new ACGA rates. Like PGM Anywhere and PGM desktop, if GiftCalcs is configured to pick rates from the ACGA rate table effective on the date of gift (the default configuration), it will continue to pick rates from the ACGA rate table that went into effect on 7/1/2022 for gift dates through 12/31/2022. It will use the ACGA rate table that goes into effect on 1/1/2023 for gift dates of 1/1/2023 onward. Also, like PGM Anywhere and PGM desktop, if GiftCalcs is configured to use a specific ACGA rate table or a custom rate table, it will continue to use that table for picking gift annuity rates no matter the gift date.

A Word of Caution

A few charities have asked us whether they can offer the new higher ACGA rates before January 1, 2023. A charity must file its schedule of maximum rates for annuities issued to residents of Alabama, Arkansas, California, Maryland, New Jersey, New York, and Washington. The charity cannot issue an annuity to residents of these seven states that exceeds the rates on file with state regulators. If a charity has previously filed an ACGA rate table, the state will generally assume that the charity will adopt any new ACGA schedule as of the ACGA’s stated effective date. (The ACGA sends copies of new rate schedules to the state insurance departments.) Any acceleration or delay in adoption would need to be specifically communicated to the state. In addition, it would violate New Hampshire law for a charity to issue annuities using the new ACGA rates before the rates become effective on January 1, 2023.

Maximum Annuity Rates for NY Donors

Since 2020, New York has updated quarterly its maximum annuity rates for annuities issued to New York donors. Except for Q3 and Q4 of 2022, the New York rate has been lower than the ACGA rate for some male ages and more female ages. The new ACGA rates are slightly higher than the Q4 2022 New York maximum rates for females ages 66-82. While it is possible that some of the newly increased ACGA rates will be higher than New York’s rates when New York posts its one-life rates for Q1 2023 in early January, it seems likely that New York’s Q1 2023 rates will be higher than its Q4 2022 rates due to interest rate increases over the last three months. If that is the case, New York’s one-life maximum rates for Q1 2023 should be higher than the new ACGA rates at all male and female ages. The same may not be true for two-life or deferred gift annuities.

Legislation is pending in New York that would greatly reduce the likelihood of its maximum rates continuing to be lower than the ACGA’s suggested maximum rates for any male or female ages. The New York Senate has passed the legislation. It remains in committee in the New York Assembly. The next New York legislative session begins on January 4, 2023, so the New York Assembly will soon have another chance to pass this hoped-for legislation.

In the meantime, you can look up New York’s 1-life maximum annuity rates by going here and clicking the “Present Value of Immediate Annuities . . .” link. To compute the maximum allowable payout rate, divide the value in the maximum income column by 10 for the age and gender in question. If you need to know New York’s maximum annuity rate for a 2-life annuity or a 1-life or 2-life deferred annuity, fill out this form to request a calculation.

Conclusion

The ACGA suggested maximum annuity rates for immediate payment gift annuities will increase moderately at all ages, effective January 1, 2023. ACGA rates for deferred gift annuities will increase more significantly. The longer the deferral period, the greater will be the increase. The recent spike in the IRS discount rate means that deductions for gift annuities paying the increased ACGA rates will still be higher for many annuitants than they were when the previous rate went into effect in July. The combination of higher annuity rates and generous deductions should make gift annuities even more attractive to many donors.