Analysis of the New ACGA Annuity Rates

On May 8, 2020, the American Council on Gift Annuities (ACGA) announced there would be new suggested maximum gift annuity rates, effective July 1, 2020, to replace the rates that became effective on January 1, 2020. The ACGA released the new 1-life annuity rates on May 29, 2020 and the 2-life annuity rates on June 11, 2020. The ACGA’s decision to reduce its suggested maximum gift annuity rates was triggered by the plunge in interest rates starting in mid-February, one of the countless consequences of the ongoing coronavirus pandemic.

The new suggested maximum rates are moderately lower than the ones they replace. The new rates were set with the goal of 50% of the funding amount remaining for the charity on average, as well as a 20% present value. The rates also ensure a contribution value of at least 10% of the funding amount at all ages down to an IRS discount rate of 0.6% (as compared to 1.8% under the January 1, 2020 rates). These additional criteria cause the maximum rates suggested for younger ages (under 50) to be lower than they otherwise would be.

ACGA Suggested Annuity Rates, Effective July 1, 2020

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 7/1/2020. Only items 3 and 6 differ from the assumptions used to determine the rates that went into effect on 1/1/2020.

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 0.6% (down from 1.8%).
4. The suggested rates use the 2012 IAR Mortality Tables, which incorporates projections for increasing life expectancies (improvements in mortality). Annuitants are assumed to be 50% female and 50% 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 2.75% percent (down from 3.25%).
7. The rates for the oldest ages (81 and above) are somewhat lower than the rates that would follow from the first five assumptions. One-life rates are capped at 8.6% at age 90 (down from 9.0%) and the rates from 83 to 89 are graduated downward from that cap.

Immediate Payment Annuity Rates Will Decrease Moderately at All Ages

For typical annuitant ages, 70 and older, the new single-life rates will be 0.4% - 0.5% lower than the rates they replace. They will be capped at 8.6% for annuitant ages 90 and over, a 0.4% decrease. Two-life annuity rates are also 0.4% - 0.5% lower at most joint ages throughout the schedule, culminating in a cap of 8.4% at the highest ages, down from 8.8% under the current table.

The figures in the table below give you a sense of how the new rates and resulting charitable deductions will differ from the current rates and deductions over the range of common annuitant ages. They are based on a $10,000 immediate payment gift annuity that makes payments at the end of each quarter, and a June 2020 IRS discount rate of 0.6%. For comparison, the deduction under the current rates and the February 2020 IRS discount rate of 2.2% is also shown.

Comparison of New and Old ACGA Rates

Not surprisingly, a decrease in annuity rates causes an increase in deduction. You can see how much by comparing figures in the “Deduction 6/20” and “New Deduction” columns. The “Deduction 2/20” column shows, however, that just four months ago – February 2020 – when the IRS discount rate was 2.2%, the deduction available using the current higher annuity rates was, in many instances, higher than the deductions that will be available under the new lower rates and June’s 0.6% IRS discount rate. The offer of a lower annuity rate and lower charitable deduction may be a surprise to supporters who have considered or funded a gift annuity in the past few years and are considering one again. One consolation of the historically low deductions for gift annuities is a historically high tax-free portion of annuity payments.

Deferred Gift Annuity Rates Will Decrease More Than Immediate Annuity Rates

The ACGA has decreased the compound interest factor for deferred gift annuity (DGA) rates from 3.25% to 2.75% for all deferral periods. This means that the deferred annuity rate will increase less per year of deferral under the new recommendations than under the current ones. Because of this decrease, the longer the deferral period, the greater the difference between the old DGA rates and the new ones will be.

The figures in the table below show how the ACGA recommended rate for a DGA deferred 5, 10, or 15 years will change under the new schedule. The annuity amounts are based on a $10,000 funding amount.

New DGA Rates vs. Old DGA Rates

What if the IRS Discount Rate Dips Below 0.6%?

The present value of a gift annuity's payments must be less than 90% of the value of the property contributed for the arrangement to qualify as a charitable gift annuity. As a practical matter, this means the charitable deduction must be more than 10% of the value of the property contributed. A charity that issues a charitable gift annuity that does not pass this 10% test may incur adverse tax consequences. The new ACGA rates are designed to yield a deduction of more than 10% for all immediate payment gift annuities when the IRS discount rate is 0.6% or greater.

Even at an almost unthinkably low IRS discount rate of 0.0%, the new rates for immediate payment annuities will result in deductions of more than 10% for single-life annuitants who are 58 or older, and for joint-life annuitants who are both 64 or older. These ages are below the age range of the typical immediate payment gift annuity beneficiary, so it appears unlikely that gift planners will encounter situations where they need to offer less than the new ACGA rate in order to meet the 10% deduction requirement.

Note that all PG Calc software that computes gift annuity deductions issues a warning whenever it computes a gift annuity deduction of 10% or less.

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

If your PG Calc software is configured to use the ACGA rate table effective on the date of gift to pick default annuity rates, which is the default configuration, it will continue to use the ACGA rate table that went into effect on 1/1/2020 for this purpose for gift dates through 6/30/2020. It will use the ACGA rate table that will go into effect on 7/1/2020 for gift dates of 7/1/2020 onward. If your PG Calc software 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 date of gift.

A Word of Caution

Charities have asked us whether they can offer the ACGA rates that went into effect on January 1, 2020 after the July 1, 2020 effective date of the new ACGA rates. State regulation of gift annuities will make this difficult or illegal in eight states. 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 July 1.

Annuity Rates for NY

New York has adopted a new method for determining its maximum annuity rates for immediate annuities issued to New York donors in 2020 and beyond. New York now updates its rates quarterly based on a matrix of interest rates that vary depending on how soon after the gift payments will start and the age of the annuitant. New York’s maximum rates are lower for females than males. In instances where the New York maximum rate is lower than the ACGA rate, New York regulators expect the charity to offer an annuity rate that is equal to or less than the New York maximum rate. Our understanding from New York regulators is that the maximum rates published for one quarter apply to annuities issued in the next quarter. For example, the rates for Q2 of 2020 will apply to annuities issue in New York during Q3 of 2020. The New York Department of Financial Services has not posted its maximum rates for Q2 2020, so we cannot comment on any conflicts between New York’s maximum annuity rates and the new ACGA rates. We do know that New York’s rates apply only to annuities issued to New York residents. We will share more information on New York’s maximum annuity rates when we have it.

Conclusion

The ACGA suggested maximum annuity rates for immediate payment gift annuities will decrease moderately at all ages. ACGA suggested maximum annuity rates for deferred gift annuities will also decline. The longer the deferral period, the more dramatic will be the decrease, primarily because the interest factor for the deferral of payments will decrease from 3.25% to 2.75%. Despite these declines in annuity rates, gift annuities will continue to be an attractive gift vehicle for donors who wish to support your organization’s mission and are also interested in receiving fixed payments for life.