What is an Annuity?

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.

Reach out today

Contact us today and book your consultation https://www.quigley.ie/book-consultation and see how Quigley Financial Brokers can help you choose the best options available or contact richard@quigley.ie for further information.