Invest in a 10 year annuity and save tax

Here is an idea. An annuitant can invest in a 10 year annuity and save on tax.

Annuity is now exempt from tax. Here is an example of how it can be used for tax saving.

The annuitant invest $10,000 to receive an annuity certain of $1,232 per year for 10 years. This assumes that 4% interest is used in the computation.

The total payment for 10 years is $12,320. The actual interest earned is $2,320. If the annuitant pays income tax at 10%, the tax payable on the interest component should be $232. By investing in an annuity plan, the annuitant save $232 on the tax.

The tax saving add 0.4% to the yield. This is the same as investing in another product to earn 4.4%, pay income tax at 10% and get the same net return as the annuity.