The Orca Financial Guide to understanding Annuities
Pensions can be complex products, so it is important to get the right financial advice. At Orca Financial we will take you through all the pension options, explain things like AVCs, PRSAs and Annuities, and help you put a plan in place that suits your needs perfectly, and offers maximum tax efficiencies.
What’s is an annuity?
You pay an insurance company (or a life assurance company) a single lump sum of money from your retirement fund. In return, that company guarantees you a regular pension income for the rest of your life. The contract between you and the insurance / life assurance company is known as an annuity.
How much of a regular pension income could I expect from an annuity?
This depends on a number of things, such as:
- the sum of money that you invest in the annuity
- whether you are male or female
- the type of annuity you want
- your age and state of health at the time of buying the annuity
- the ‘annuity rate', which is the percentage of your investment that the company agrees to pay you as a regular pension
Before buying an annuity, you need to decide:
- Do you want part of your pension to continue to be paid to one or more dependants after you die?
The income you get from your annuity will be less if you choose:
- an escalating annuity – an annuity that increases each year or
- an annuity that provides some payment for your dependants after you die.
If you choose a level pension, you will get a bigger income now, but inflation will gradually reduce its value as you get older.
Advantages of annuities
- You get a secure, regular income for life, so you know exactly where you stand financially
- You can choose an annuity type that best suits your needs, such as one that gives a part-pension to your dependants after you die.
- Investing in an annuity is a once-off transaction
- Your income is guaranteed, so there is no investment risk attached
- You pay lower charges than with an Approved Retirement Fund
Disadvantages of annuities
- Once you agree the annuity, your income level is fixed or indexed to an agreed amount per year, and cannot be changed
- If you choose a fixed income, inflation is likely to reduce its value over time
- The annuity rate is fixed the day that you buy the annuity, so you won’t benefit from any later increase in annuity rates
- Your annuity income is only for your own lifetime, the money you used to buy the annuity does not go to your dependants
Tell me about the taxes
You will pay income tax and Universal Social Charge (USC) on the income that you receive from your annuity.
Talk to Orca Financial
Here in Ireland, the market is quite competitive, with are a number of insurance and life assurance companies offering annuities. While buying an annuity is once in a lifetime for you, it’s something we advise on every day. At any given time, we know what the various companies are offering and where you will get the best annuity rate.