Annuities - Avoid if at all possible
Why would you buy an Annuity if you could avoid it? As a Financial Advisor I used to tell people that Annuities were based on average life expectancy and in simple terms the Provider was giving you back your original capital plus some interest. However when you do the sums this is not really the case as in all examples I've looked at in recent months the typical breakeven on an Annuity is close to 90 years of age. This is based on a level annuity (so payment remains level with no index linked increases) guaranteed for a minimum period of 10 years (the longest available).
Taking a real example, if I were 65 today and I was purchasing a Single Life Annuity as above (Level, 10 year guarantee) with a pension fund of €200k, I would get a rate of 4.16525% meaning I would be paid €694.21 (gross) per month for the rest of my life. €694.21 multiplied by 12 is €8,330.52 per year so if I divide my €200k by that I see that I would need to be in receipt of that income for 24 years just to have received my original €200k back. While I accept the point that were I fortunate enough to live beyond 89 it would continue to pay I do not think that equation represents value and I would go so far as to say you'd need your head examined if you think that transaction is fair. In the event of my death the annuity would cease (but the Provider would pay any balance remaining under the 10 year guarantee). I appreciate that I could set up the Annuity on a joint life basis so in the event of my death my wife would receive a % of my annuity income for the rest of her life BUT doing so comes at a cost as a joint life annuity will reduce the annuity rate further.
With the exception of members of Defined Benefit pension schemes, virtually everybody else in Ireland can avoid purchasing an Annuity and instead invest their pension fund at retirement into an Approved Minimum Retirement Fund 'AMRF' (First €63,500 of your Pension Fund after taking 25% tax free lump sum) and the balance into an Approved Retirement Fund 'ARF'. Since January 2015 you can take an optional income of 4% from the AMRF and you must take a minimum income of 4% p.a. from the ARF (as the taxman wants a cut) so let's assume you take 4% of the €200k Fund in the example above (€8k gross). This is comparable to the annuity income BUT you retain ownership and control of YOUR Fund unlike the Annuity where you have given away your €200k. The AMRF / ARF do have to be invested into pension funds where they grow tax free so you'll also benefit from any growth.
By choosing cautious / defensive pension funds and I would suggest an average return of at least 3% p.a. should be achievable. In the event of death, your spouse inherits the remaining Fund and in the event of her death it goes to the children or estate. As an Advisor I would recommend the AMRF / ARF route over an Annuity in almost all circumstances.
If you would like further information on the above, or to discuss your Pension / Retirement in more detail feel free to contact us using the form below, emailing firstname.lastname@example.org or by calling (01) 293 7200.