Annuities appear to have taken a hit in the old popularity stakes of late. But for some they could still be an important option when planning for retirement.
Financial decisions can be difficult and this alone can be a contributing factor to financial stress. But if you can understand how various elements of financial planning work you’ll be far less daunted by the age-old retirement questions around future proofing your financial circumstances so that you can enjoy the comfortable retirement you deserve.
In my experience as a financial advisor delivering financial wellness programmes a common question I hear is “what to do about my pension”. Very few people nowadays ask me “what to do about my annuity” – and the reason for this, I guess, is that people simply don’t know what annuities are. Do you?
While many have a general understanding of pensions, annuities typically lurk under the radar of the average employee’s financial literacy.
For some, however, an annuity may present a good retirement planning option. At the very least, they help complete the picture of financial planning options available to employees when planning for retirement.
So, in this article I’ll shed some light on the world of annuities. At the end you’ll know exactly what they are.
What is an annuity?
An annuity is a regular income paid for life. You buy it with your retirement savings and it will pay you (and your spouse in some cases) an income for the rest of your days.
Annuity Pros and Cons
A rate of 4% on your annuity would return €4k per annum for every €100k spent. The problem with an annuity is that the €100k is gone. No money back if a person dies after 5 years say, when only €20k has been returned. A very poor return I think most will agree.
The flip side of this, however, is that if a person lives until they are 120 years old the annuity will still be paying them an income. In this instance it becomes a smart choice.
Annuities come in all shapes and sizes
Annuities come in various shapes and sizes too. For example, there are some single life annuities which will only pay while one policy owner lives, compared to a joint life annuity which will continue to pay some or all of the benefit to the first policy owners spouse.
Annuities can increase their payment to the policyholder over time too or they can stay level throughout the term.
Annuities can have guaranteed period which mean that even if the client dies in that period the annuity will continue to pay out until the end of the guaranteed period. There is even now something called and enhanced annuity.
This is an annuity which will give you a better rate if you have listed medical condition. I guess they feel the chances of you being around for a long time are less so they will pay you out more every year!
Annuities then and now
Annuities were once the alpha male of the retirement landscape in Ireland – strutting around, providing strong and consistent returns for their investors for life. They often provided a return of 8% – 10% per annum, so were attractive options for clients.
However, this landscape changed back in 1999, when you were no longer obliged to buy an annuity with your retirement savings. This, combined with a reduction in annuity rates since then, meant that annuities began to lose favour.
Why would someone consider an annuity today as part of their retirement planning?
Some retirement contracts have guaranteed annuity rates built into them. If this is the case then you should sit up and take notice. These rates are typically far better than are available today.
There is a rule in Ireland at retirement that says that once you have taken 25% of your fund tax free you must then must show a guaranteed minimum income of €12,700 for life to allow you unrestricted access to the balance of 75% of your money. If you don’t have this guaranteed income then you will either have to use the first €63,500 to buy an annuity or invest in an AMRF.
One little work around is that if you are in receipt of the state pension which will be €12,651 from next March, then a very small annuity purchase will get you over the €12,700 guaranteed income line which then frees you up to have full access to the balance of your retirement savings.
Also, in bankruptcy, an allowable regular income for life can often mean a client gets some value for their retirement savings. If left in another form, the same savings could be lost to creditors.
An annuity is your choice
So there you have it, all you need to know about annuities in order to decide whether they are worth looking into further for you, or whether you can do without. If you are considering purchasing an annuity my advice would be to shop around since different providers have different annuity rates.
If you have any questions about annuities or any other aspect of the pensions industry feel free to leave a comment below and I’ll be sure to address it. In the meantime, sign up to our Financial Planning Newsletter for more articles and tips.