Annuities are often undesirable beings that live in the corner of the retirement room.
They were once the alpha male, strutting around, dominating the retirement landscape and providing strong and consistent returns for its investors for life. They often provided a return of 8% – 10% per annum so were attractive options for clients.
This was before the landscape changed back in 1999 and you were no longer obliged to buy an annuity with your retirement savings. Combine that with a reduction in annuity rates since then, has meant that an annuity is no longer a popular choice for clients.
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. A rate of say 4% would return a client €4k for every €100k spent. The real problem with annuities is that the €100k is gone. No money back if a client dies after 5 years when only say €20k has been returned. A very poor return I think most will agree! The flip side of this is that should a client live until they are 120 years old the annuity will still be paying them an income and in this instance, it becomes a smart choice.
Some retirement contracts have guaranteed annuity rates built into them and if this is the case then you should sit up and take notice. These rates are typically far better than are available today.
Furthermore, annuities do sometimes serve a good purpose. There is a rule in Ireland that says that once you have taken your lump sum you must have a guaranteed income for life of at least €12,700 or you must invest €63,500 into an Approved Minimum Retirement Fund (AMRF). I’ll go into more details on AMRF another day.
Considering the state old age pension is now €12,391 per annum, you can purchase an annuity for €309 per annum costing about €7725 of your retirement savings. This will mean that you have satisfied the above requirement and can have access to the balance of your retirement savings if you wish.
Also in bankruptcy, there is an allowable regular income for life. If a client invests into an annuity with their retirement fund it can often mean a client gets some value for their retirement savings. Whereas if it was left in another form, the same savings could be lost to creditors.
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 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 or if you’re a smoker. 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!
Of course, different providers have different rates so always worth shopping around too.
All shapes and sizes as I said. And yes, lots of jargon too but it wouldn’t be the pensions industry if there wasn’t a bit of jargon.
As always if you have niggling doubts in your head or need more information on any of this please just get in touch with me directly on email@example.com or call me on 01 531 0571.