Buying an Annuity at Retirement

What is an Annuity?

An annuity, commonly known as a pension, provides you with security of income for life during your retirement. It is paid monthly into your bank account. It is purchased with some (or all) of the retirement savings you have built up throughout your working life.

An annuity can be an attractive option if:

·         Your pension fund will be your main source of income in retirement

·         Your main priority in retirement is a secure regular income rather than passing on your fund to your dependants

The amount of income you receive depends on the size of your pension fund and the annuity rates in force at the time you purchase your annuity.

What is an Enhanced Annuity?

An enhanced annuity is the same as a standard annuity, except that it takes into account your health status and lifestyle health risks in determining the level of regular income payable to you. With an enhanced annuity you may be entitled to a higher regular income than you would under a standard annuity.

Where medical conditions may go against you when applying for some life policies, with an Enhanced Annuity having an underlying medical condition may lead to you possibly getting a better deal or more favourable terms. Cancer, heart or neurological conditions, diabetes, stroke or some lifestyle factor such as smoking are just some examples. Life expectancy is also one of the main dictating considerations in calculating annuity rate risk and this unique annuity addresses that issue.

What sort of medical information will I need to provide?

In general, the more detailed the information you can give, the more likely it is that you will receive an offer of an enhancement.

Some of the details required are:

1. Your weight and height

2. Your smoking history (past and present)

3. Any medication you are on (it’s best to have the names and dosages ready)

4. Full history of any medical conditions or incidents in your past

I want to also provide a pension for my spouse/civil partner; how does that work?

The medical history for both you and your partner will be assessed and quoted based on your joint medical history. The annuity may be enhanced if either of you have a medical history, which means the extra income applies to both of you. If you both have a medical history, the enhancement will be respectively bigger. A doctor must be able to verify the information provided in respect of your dependant.

It’s Not Too Late…

Are you over 50 and thinking it’s too late to save into a pension?

Never fear…although it’s regularly said that the time to start a pension is yesterday, it is not too late to start in your 50’s. For some, it is a time in life when there may be less expenses and perhaps more disposable income. The picture of life in retirement is going to look different for everyone, but it’s worth thinking about what lifestyle you would like when you retire and what income would allow you to live comfortably in that lifestyle.

Starting a pension at 50 with an aim to retire at 66 would give you 16 years to grow your pot. One major advantage is the ability to contribute 30% of your income while receiving tax-relief should you wish. This rate increases to 35% between the age of 55 and 59 and is up to 40% from age 60 onwards.

In Ireland, there is a contributory state pension of around €13,000 a year (The Pension Authority, 2021) which doesn’t kick in until you turn 66. The amount you receive as a state pension will depend on your number of Pay Related Social Insurance [PRSI] contributions. Do you think you could retire and get by on €253.30 per week? If not, now is the time to act.

Usually as we get closer to retirement, we have more disposable income for multiple reasons. Children no longer financially relying on us, mortgages and loans paid off and our salary has hopefully increased significantly. What a lot of people do not realise, is that they can probably afford to contribute more to their pension than they may think.

If you are on the higher rate of tax and invest/save €192,000 into a pension during the 16 year term above, you would receive €76,800 in tax-relief. So, it will cost you €115,200 (€600 per month net cost to you) to have €192,000 in a pension before you even factor in any potential growth.

At a very conservative rate of 3%, this could leave you with a pension pot of €245,000. That would give you a cash lump sum of €61,250 for your retirement party and you could easily drawdown an annual salary of €9,100 (or more if you wanted) on top of that to supersize the state pension.

Paid Up Pensions…what to do with them?

A paid-up pension is a pension that you may have had with a previous employer and upon leaving employment and ceasing payments, you may not have enquired about or moved to your own name.

How do I get information about my old Pension?

In most cases you should be receiving annual benefit statements with general details (including the value) of your pension. Though if you have moved to a new address, you may not be receiving this information annually or at all. If you are unsure where to look, the company’s human resource department (or Employee Pension department if there is one) is a good place to start.

Can I bring my pension with me when I move employment?

In most cases, when you leave employment, you have several options. You are entitled to request “leaving service options” which sets out what choices are available to you. This can intimidate and confuse people but if it’s explained correctly, I find people are more confident making the decision to move their pension into their own name.

Will I lose out if I move out of the old Pension arrangement?

The only way of knowing is by enquiring about the benefits currently included on the pension plan, but in many cases, you can gain from moving your pension funds into your own name.

One of the main advantages is that you get direct access and information sent to you personally about your pension. Many people like to have complete control over their pension without having to contact a Trustee (or past employer) anytime they want information regarding their policy.

What can a Financial Adviser do for you?

Part of our job is to help people arrange their pensions together into an efficient / transparent portfolio. In simple terms this means you know exactly what you have, where you have it and when you can access the funds. In certain cases, individuals are surprised to learn they may have access to part of their pension once they reach age 50.

Cashflow Planning

The heading makes the task sound a bit boring, and slightly business-like… but the actuality of this term is something we all do in everyday life! Each month, most of us will have bills to pay, maybe a mortgage/rent, household utilities, insurance…followed by food/clothing bills, savings and hopefully some funds to put aside for a social life or something nice to enjoy as a reward for our hard work. This short-term planning is an important and smart habit to have and can help us be prepared for any unexpected bills or events that may occur along the way.

A secure online financial planning system we use for creating financial reviews can help with the long-term cashflow planning. It allows safe access to a portal where you input your expenditure/liabilities, savings/income and most importantly, your objectives now and further into the future. The more information you can input, the clearer the picture can be for your financial adviser and the more accurate the recommendation. It helps to highlight any areas where you may need to perhaps direct funds towards protecting yourself and your family or maybe towards saving for big life events such as starting a family, college fees, buying a property or preparing for life in retirement, to give some examples. Or maybe you have a dream of cruising around the world and want to figure out how you can make it happen!

Although this system helps identify the areas you need to focus on and it is planning for the long-term, nothing is ever set in stone and life can change in a heartbeat. The results and graphs can show you various scenarios throughout your life and the impact they may have on your finances.

Once we provide the results and recommendation, it is up to you to decide on the next step. As life can be ever-changing and unpredictable at times, we feel it is important to review your cashflow status every one to two years or should your circumstances change. So, as you have your monthly planning habits, an annual check-in on your cashflow plan will help give you peace of mind knowing you are using your money wisely and as best you can to achieve your goals.

Apart from mapping out a financial plan for the future, it is also a good opportunity to review any existing life policies or pensions you may have. Once you give signed instruction to a provider, your adviser can contact the life and pension companies on your behalf for further policy details. If you would like to see more information on cashflow planning, just visit www.drumgoolebrokerage.ie/planning.

Saved Smart… what’s next?

Potential options for a €200,000 Pension

Last month we looked at how you can potentially turn €120,000 of savings into a pot of €200,000. Our sample subject took the advice provided and placed €40,000 of their salary into a pension for 5 years, between the ages of 60-65, to build up a pension of €200,000. They received tax-relief of 40% on these pension contributions. So, what can they now do with their pension savings?

There are different potential retirement options available in what is called an Occupational Pension plan. For the purposes of keeping this simple, I will discuss the retirement options that are available in most pension arrangements. The options for our sample retiree will be as follows:

Value at 65:    €200,000

Tax-Free Lump Sum: 25% of the fund = €50,000

Balance of Funds: €150,000 - can be used to provide a level of income for life in one of the following two ways:

1.    Annuity

You place your €150,000 with a pension company and they pay you a guaranteed income for the rest of your life. At the moment, a 65-year-old may get an income of roughly €5,325 per year (subject to income tax)

The biggest pro of this option is that you are not reliant on fund performance. The biggest drawback is that once you have purchased the pension, you cannot make any changes and once you pass away it ceases.

2.    ARF/AMRF (Approved Retirement Fund / Approved Minimum Retirement Fund)

This is where you reinvest your €150,000 and draw an income out of the proceeds. The biggest benefit is the flexibility (you can take different amounts when you want) and this will pass onto your estate/partner upon your death.

The biggest downside is that you can theoretically draw it all down and/or the fund value does not perform as well to make back what you take out of it.

“I pay income tax on my pension when I retire?!”. This is something I hear from time to time, but remember, you will have had tax relief when you put money into your pension, you gained tax-free growth on your savings, and you received 25% of the fund tax-free at retirement.

Not just that, at retirement you are earning less income, with a sole pension of €150,000 and only the state pension. A lot of individuals (and couples) will pay little to no income tax on their €150,000.

Turn a savings pot of €120,000 on deposit, into €200,000 in 5 years...

Following on from planning for your retirement in last month’s article, I will give an example of how you can really take advantage of tax relief to grow your savings. The following example is theoretically possible for many people, subject to certain revenue guidelines and depending on what pensions you already have accrued.

I will use an example of a person aged 60 who may consider this proposal, for the purpose of this article. They either have no pension savings or are looking to boost their pension pot as much as they can before retirement. I am going to assume they are currently on a salary of €100,000 and are paying 40% income tax on more than €40,000 of their take home income. (for a married couple with one/two salaries, the income tax rate may differ).

Salary subject to 40% Tax Income tax @ 40% Income in pocket

€40,000 €16,000 €24,000

·         In this example I have not included PRSI / USC or any other expenses/benefits, this is just to highlight income tax relief potential.

In this illustration the “income in pocket” portion is the income you will be receiving into your hand after income tax has been deducted.

Say this person has substantial savings on deposit, for example €120,000 sitting in their bank account. We know that €40,000 of their annual income is only worth €24,000 into their hand after they pay income tax.

If you pay into a pension, you get tax relief at your standard rate (you do not pay income tax subject to revenue limits). So, for 5 years, this person could put €40,000 per year from their income into a pension. Their take-home income would decrease by €24,000 but if needed they could subsidize it (if they want) by taking funds from their €120,000 savings (€24,000 x 5 = €120,000).  After 5 years they would end up with a pension pot of €200,000 at 65.

At 65 you could have €200,000 in your pension but since you received €80,000 (€16,000 x 5) in tax relief it only cost you €120,000 to get your pension to €200,000. For a self-employed person, the savings could be even greater as they may have to pay over 50% tax (PRSI/USC) on money drawn down from their company. They may have the option of putting in a company contribution of up to €200,000, which may have only been worth €100,000 in drawn down income.

In the next article I can look at the options you would have with your €200,000 pension.

€100 For Cover That May Only Cost €70???

Our new financial planning system has been hugely successful and popular in assisting clients with setting budgets and plans in place for their future. We try to get people to visualise what they would like to have as a goal, whether it is to pay off a mortgage early, retire early, travel the world or simply provide for family later in life.

Another handy way it can help is to configure whether a person has enough protection in place. Whether it is mortgage protection when purchasing a home or perhaps income protection for a self-employed person, the first question we ask is …how much have you got to spend? This is a great starting point as we can then provide various quotes to accommodate this figure without going over budget before we have even begun!

The following is an example of a quote for Joe Bloggs who is a married, 35-year-old, non-smoker who told us that he has €100 as a monthly budget for his protection needs. In his case, the three main areas he wanted to review was protection for his income, life cover for his family and specified illness cover.

View fullsize

After we provided Joe with these quotations, we were able to inform him that he can claim tax relief on €75 of this cover at his standard tax rate (20% or 40%). This meant that he could save €15 to €30 a month bringing the total cost (€100) of the cover down to as little as €70 per month.