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An annuity is a single premium insurance policy where, in return for a lump sum
payment (called the purchase price), the life company guarantees to pay a specified
level of regular income for the lifetime of the individual who takes out the annuity
policy. Most annuities have a minimum guarantee period, typically the first five years,
which means that if the individual dies within this period, the annuity continues to be
paid for the remainder of the guarantee period to his or her estate. So, no matter
what happens, an annuity with a guarantee period will be paid for that period at least.
Benefits of Annuities
The potential benefits of annuities for the individual are:
• Certainty of income in retirement. The annuity will provide a predictable level of
retirement income for life.
• Longevity insurance: the annuity is payable for as long as the individual lives.
• Simplicity: once the annuity is purchased and set up, no further investment advice
is needed.
Risks of Annuities
However, purchasing an annuity as compared does carry potential risks for the
individual:
• Timing risk: the annuity payable for life is fixed on the day it is purchased, which in
turn will be heavily influenced by EU Government Bond yields ruling on that day.
There is therefore the risk that the individual buys the annuity at a time when bond
yields and hence annuity rates are very low. Even if bond and annuity rates rise later,
the individual cannot undo the annuity and is stuck with the rate set on the day he or
she purchased the annuity.
• Mortality risk: the risk of dying before all of the capital sum invested in the annuity
has been received in annuity payments, and so lose part of the capital sum invested.
• Inflation risk: most individuals who purchase an annuity purchase a fixed or level
annuity. Over time the purchasing power of the annuity will decline with inflation.
Taxation
The income from an annuity purchased with the proceeds of a pension arrangement
is liable to income tax and USC (but not PRSI) in the individual’s hands. The life company will operate PAYE on the annuity payment, as if it were the
individual’s ‘employer’.
Making the Right Choice
With so many different plans and options available we all need some guidance
making the correct decision. There is plenty of advice available at Quigley Financial
Brokers with the help of a Qualified Financial Advisor (QFA), to see which option
might be more suitable for you at retirement. There is no right or wrong answer as to
which option is better - just which one is better for you.
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