An annuity is an agreement with an insurance company to pay you an income for life.
When you retire, the pension fund(s) you have paid into (perhaps an executive pension, a personal pension, or a PRSA), are available to you. You can then take decisions on what to do with this money.
Traditionally, many people used their pot of money to purchase an annuity. It works as follows: you hand your pension fund to an insurance company at retirement. In exchange, the insurer promises you a certain level of income each month.
Insurance companies will offer an annuity at a particular ‘annuity rate’, based on your age, health and other aspects of your situation.
For example, a 66-year-old non-smoker with €400,000 to invest in an annuity might be offered an annuity rate of something like 4.2%, or €16,800 per year, for life.
What’s good about annuities?
Annuities are attractive to many people because they offer a guaranteed regular income. They’re a clean deal.
There is no need to worry about the ups and downs of the stock market, or to manage your pension investments. Because it’s an income for life, you don’t need to worry that your pension fund will reduce to zero.
Annuities also come in many shapes and sizes. For example, annuities can be based on the joint lives of you and your partner.
They can be designed to provide an increasing income which keeps pace with inflation. And they can be designed to return some of your pension fund to your estate if you die in the early years of retirement.
On the other hand…
Over recent years, annuity rates have reduced substantially. This is one reason why Approved Retirement Funds have become very popular among people retiring in Ireland.
ARFs offer more control over your investments, as well as the possibility of long term investment growth.
Read on: Approved retirement funds (ARFs)