At retirement, most of your pension may be needed to purchase a guaranteed income for life or ‘annuity’. This is likely to be one of the most important financial decisions of your life, and it is crucial that you get it right.
Before purchasing an annuity, we strongly urge you to seek independent financial advice. As Ireland’s largest administrator of occupational pension schemes, Mercer is well positioned to advise on annuity purchase – particularly, but not exclusively, if your plan or scheme is run by us. If you want advice on purchasing your annuity, call us on 1890 375 375 or simply use our Contact Form.
Members of defined benefit pension schemes
A defined benefit pension scheme is one where the scheme promises a level of income based on salary and years of service. If you are a member of a defined benefit pension scheme, you should receive a lifetime income automatically from the scheme after you complete your options form. If this applies to you, you will not need to worry about an annuity purchase.
Other pension holders
If you hold a personal pension, a PRSA, a Personal Retirement Bond, or if you are a member of a defined contribution pension scheme, you may decide to use at least part of your pension to buy an annuity.
Workings of an annuity
If you purchase an annuity, you buy the right to receive a guaranteed income for life. This is generally paid on a monthly basis. The annuity is taxable in a similar manner to employment income, and tax will be deducted at source by the life assurance company that provides your annuity.
Alternatives to an annuity
Depending on your precise circumstances you may have the following alternatives to an annuity:
- Tax free cash
- Taxable cash
- An Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF)
Not all of these options will be available to all pension holders.
Who to buy your annuity from
When considering an annuity purchase, it pays to shop the market as not all life assurance companies provide competitive annuity rates. You should ensure that your adviser checks the market for the best rates available before you proceed to purchase your annuity as the differences can be substantial. When purchasing annuities for our clients, Mercer performs a thorough market review to ensure you receive the most competitive annuity rate.
It is important to consider the following when buying an annuity:
1. Spouse’s pension
You may wish to ensure that, should you die before your spouse, he or she receives a proportion (for example 50%) of the annuity until their own death. However opting for a spouse’s annuity will reduce the level of annuity you can purchase.
2. Guarantee period
You may wish to ensure that, even if you die soon after the annuity is purchased, full payment of the annuity is guaranteed for a period, for the benefit of either your spouse or your estate. Mercer almost always recommends a Guarantee Period of at least five years; however, a longer Guarantee Period will lower the level of annuity you can purchase.
3. Inflation protection
You may wish to protect the real value of your annuity by arranging for it to rise over time, either by a fixed percentage amount each year or in line with inflation. However, buying inflation protection can significantly reduce the initial level of the annuity you can purchase. It may take over twenty years for an inflation-protected annuity to deliver better value than a level annuity; however, in a period of rapidly rising prices, inflation protection could provide value much earlier than this.
4. Keeping it simple
You may wish to maximise the initial level of your annuity by opting for no spouse’s pension, a short guarantee period and no inflation protection. However, this may not be advantageous if you die before your spouse, if you die early or if inflation rises.
5. Enhanced annuities
An Enhanced annuity, offering higher rates of payment, may be available to you if you have a health condition.
If you are close to retirement and would like to be fully informed about your annuity options, we recommend that you: