Pension Annuities: Retirement Income For Your Whole Life

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As you approach retirement, you’re faced with important decisions about how to manage your finances for the future. 

One crucial aspect is ensuring you have a dependable source of income to support your lifestyle during your retirement years. 

In this blog, we’ll delve into the world of pension annuities, a financial product designed to provide you with a steady income throughout your lifetime.

What are my options at retirement?

You will have various options when you retire, and subject to specific guidelines from Revenue, you can potentially combine these options. 

The range of choices accessible to you upon retirement is contingent upon your type of pension.

There are four main options available to you:

  1. Take a tax-free retirement lump sum (subject to a lifetime limit of €200,000)
  2. Take a taxed retirement lump sum
  3. Invest in an Approved Retirement Fund (ARF)
  4. Buy an Annuity

What is an annuity?

An annuity is a financial product that guarantees you a steady income for your whole life, no matter how long you live, it’s indefinite. 

Annuities can be a practical choice for their retirement income. The exact amount of money you get depends on factors like your age, how long you’re expected to live after retiring, and how much you have saved for retirement. Financial advice here is key.

Why Choose an Annuity for Your Retirement?

Choosing an annuity for your retirement can be a wise financial decision for several reasons:

Guaranteed Lifetime Income

Annuities ensure that you receive a dependable income for the duration of your life. This guarantee offers financial security and peace of mind in your retirement years.

Tax Benefits

Depending on the type of annuity and your circumstances, you may enjoy tax advantages, including tax-deferred growth and possible tax-free allowances, making annuities a tax-efficient way to secure retirement income.

Estate Planning

Some annuities offer options for leaving a financial legacy to your heirs or beneficiaries. This can be an essential consideration if you wish to pass on your assets.

Income Customisation

Annuities can be tailored to your specific needs, allowing you to choose between fixed or variable annuities, single or joint life options, and even add features like inflation protection to meet your specific requirements.

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Annuities Considerations

Investment Risk

When considering annuities for your retirement, it’s crucial to remember that annuities are just one of many retirement options. 

Consider the investment risks associated with annuities, such as changes in interest rates that may affect your future income. Although your income is guaranteed, the cost of living is not guaranteed, and this can be a reason why annuities are not suitable for your circumstances.

Engage in a conversation with one of our financial advisors at True Wealth to explore the full spectrum of choices available, taking into account the investment risks associated with each option.

Steady Income with Limited Flexibility 

Annuities provide you with the assurance of a guaranteed income for life. 

However, it’s important to acknowledge that this income may lack the flexibility that other retirement options might offer. 

You are not benefiting from compound interest investment growth as an annuity owner and this is a definite drawback to owning an annuity, 

Long-Term Commitment

Once you decide to purchase an annuity, it’s vital to understand that this is a long-term commitment. 

Annuities can’t be cashed in, altered, or swapped for other financial products once acquired. 

How does an annuity work?

You have the option to purchase an annuity with your pension fund. 

You can choose to use the entire value of your pension fund or any remaining amount after you’ve taken a tax-free cash lump sum. 

Annuities can be acquired using pension funds from the following categories:

  • A personal pension plan
  • A company or executive pension plan
  • A buy-out bond
  • Additional Voluntary Contributions (AVCs)
  • A Personal Retirement Savings Account (PRSA)
  • An Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF)

How much income will I receive?

The amount of pension income that you may receive will vary depending on your unique circumstances.

Various factors will be assessed to determine your pension income, including:

  • The size of your pension fund
  • The annuity rates at that time
  • Your age
  • Your health status (if you’re applying for an enhanced annuity)
  • Your decision regarding the inclusion of a designated dependent
  • Your designated dependent’s age
  • The health of your designated dependent (if you’re applying for an enhanced annuity)
  • What product features you select

How often can I receive my pension income?

You can decide how frequently you get your pension money. It can be monthly or yearly. 

The choice you make for your payments will also apply to any pension income that might go to your chosen beneficiary or your personal legal representative after you pass away.

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Annuity Additional Benefits

You have the option to include additional features in your annuity to make it fit your specific situation better. 

When considering these options, it’s essential to carefully consider your short-term and long-term requirements. Remember, you’re not obligated to select these extra features.

Here’ some benefits.

Single Life annuity

If you’re single, you might find a ‘single life’ annuity a good fit. It means you’ll get a pension income just for yourself throughout your lifetime.

Joint Life annuity

If someone depends on you for financial support, like your spouse, you might think about a ‘joint life’ annuity. 

This means that if you pass away before them, they’ll keep getting a pension income for the rest of their life. 

You can choose how much of your pension income they’ll receive, from 100% to as low as 20%. If you decide to give them a portion, your own pension income will be lower.

Fixed pension income

These are the most basic kind of annuities. You get a higher initial pension income compared to other types of annuities. 

However, your income won’t increase over time, and as prices go up (inflation), the value of your pension income will decrease each year. These are known as ‘level annuities.’

Escalating annuity

Inflation happens naturally, and if your pension income stays the same, its buying power will reduce over time.

That’s why you have the option to make your pension income increase every year to counter the impact of inflation.

The initial pension income you receive will be less than what you’d get from a level annuity. This is because a portion of your pension fund is set aside at the beginning to cover the increases in your pension income each year. 

Usually, you can pick to have your pension income go up by as much as 3% every year. These are known as ‘escalating annuities.’

It might take several years before the pension income from an escalating annuity matches the amount you’d receive from a level annuity. 

To make sure you’re making the right choice, talk to our financial advisors at True Wealth.

Value Protection

Single Life Annuity

If you pass away within 90 days of when your annuity contract begins or your annuity starts, a payment will be given to your estate. 

This payment will be the same as the amount you used to buy the annuity, minus any money you’ve already received.

Joint Life Annuity

If you pass away within 90 days of when your annuity contract starts or your annuity payments begin, and your chosen beneficiary (the person named in your policy) passes away before you, a one-time payment equal to the amount you used to buy the annuity, minus any money you’ve already received, will be given to your estate. 

After this, no more payments will be made under your policy.

The contract date is when your policy becomes active, and the annuity start date is when your annuity payments begin.

Guaranteed payment periods

These guarantees are made if you pass away within a specific time frame, the payments you would have received for the remaining part of that period will be given as an income to your chosen beneficiary or personal legal representative. 

Usually, it’s provided with a minimum one-year guaranteed payment period, however you can always choose a different guaranteed payment period. 

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What happens to my pension income when I die?

If you have a single life annuity without a guaranteed payment period, your pension income stops when you pass away.

For annuities with guaranteed payment periods, if you die during that time, your pension income continues to be paid to your chosen beneficiary or personal representative at the same frequency it was paid to you. 

Can I cash in my annuity?

No, according to the current rules set by the Revenue, you can’t stop an annuity and convert any remaining funds into cash. 

You also can’t modify any aspects of the annuity, like the rate of increase or changing it from a single life to a joint life annuity, once you’ve purchased it. 

Annuities are designed to give you a guaranteed income in retirement, and the options you select at the beginning are permanent. 

Therefore, it’s crucial to make a careful and correct choice when you first get your annuity. 

It’s advisable to consult one of our financial advisors at True Wealth before making this decision.

How is my pension income taxed?

The money you receive from your annuity will be treated as earned income, and the amount of tax you owe will depend on the tax regulations in place when you retire and your individual financial situation.

You’ll need to pay income tax at your highest rate, and you might also be liable for the Universal Social Charge (USC), which depends on your income and age. 

Which one is the best? Annuity or ARF?

The main difference is that with an annuity, the payment stops when the holder passes away, while with an ARF, the surviving spouse can inherit the money without paying taxes.

So, the decision is about whether you want a regular income or want to preserve the wealth for the future.

Annuity or ARF - True Wealth

* Note:

  • In the year an ARF policyholder turns 61, it’s compulsory to withdraw a minimum of 4% of the fund.
  • In the year they turn 71 this increases to 5% per annum.
  • If the ARF is greater than €2,000,000 then the minimum withdrawal is 6%.

Set up your pension with True Wealth

Keep in mind that the specific annuity options and benefits may vary in Ireland, so it’s advisable to consult with our financial advisors at True Wealth who are familiar with the Irish financial landscape and regulations. 

Our experienced team specialises in retirement planning, and we are here to assist you every step of the way, making the process simple and ensuring your financial future is in capable hands. 

We are also experts in personal and business protection, savings and investments, pension tracing, personal and business financial planning, mortgages, and wealth extraction.

Get a quote with us today to kickstart your Annuity setup and secure your retirement plans.

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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.

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