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.

Case Study – Sell or Stay Put?

I recently received an enquiry from a couple who were interested in conducting a review of their finances. They were very aware of their current situation but wanted to see what the financial future would look like in two different scenarios. They have a rental property and a home property, both with active mortgages.

Their aim was to see what the future would look like financially if they

1.    Kept the rental property, continue to use the rent to pay the mortgage and eventually have the rental income as a profit in later years

or

2.    To sell the rental property and use the proceeds to clear both mortgages.

The couple inputted their incoming and outgoing funds through our secure online financial planning portal, along with their savings / assets / liabilities and their objectives. As part of their objectives, they had also hoped to factor in starting a pension plan and to continue regular savings.

There were pros and cons to both keeping and selling the rental property but, I was able to show the various outcomes using the graphs in our planning system to show how life would look financially up to retirement age and into later years, depending on which choice they made.

In their feedback, they said that being able to see this information and to see its impact it would have on their lives, helped them to make the correct decision for now and into the future. They can also fulfil the additional objectives that they originally listed and know that they will be financially secure.

Since I first began providing this financial planning service, I have seen that no two people’s situation is identical. The system and the process can be used for many different purposes and outcomes but at the end of the day, it is providing people with peace of mind and confidence in their decisions.

There is a once-off fee and a simple three step process to get started, should you wish to carry out a financial review. Following this, you decide what step to take next. This process will, at the very least, be an education to anybody who has no short or long-term financial strategy for retirement or savings needs.

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.

Protect Your Salary

The main purpose of Wage Protector is to provide a regular income if you are unable to work for a period of time due to an accident or illness. It works when you cannot.

Who may it be suitable for?

Wage Protector is aimed more towards manual occupations such as construction workers, electricians, plumbers, mechanical engineers and the self-employed. These occupations may be classed as higher risk occupation categories meaning traditional Income Protection may be more expensive. Wage Protector is the more affordable alternative to Income Protection.

How is your benefit paid?

The income is paid from the provider directly to you, after tax, USC and any other relevant deductions.

How does it work?

It replaces 75% of your earnings for 24 months. To continue to claim after this time, a functional assessment test must be carried out to qualify for further benefit payments. The product is divided into two types of cover as follows.

Transitional cover

• Starting after your chosen deferred period, this pays you a replacement income if you’re unable to do your own job for 24 months.

• It gives you the chance to get back on your feet or prepare for an alternative job.

• Depending on the circumstances, after 24 months, you may be entitled to full disability cover.

Disability cover

• This applies if you’re unable to return to work due to significant illness or injury and you lose earnings because of it.

• You must pass a functional assessment test to qualify for this cover. This is a simple, easy-to-understand set of physical and mental ability tests.

You can claim tax relief on the premiums you pay at your marginal rate of tax.

*Sample quote from Aviva May 2022

Market Update

US markets have officially entered a bear market, with only 1932 representing a worse start to the year for the key S&P 500 market gauge. A 50/50 portfolio of global equities and global bonds look set for their worst quarter in history.

However, it is worth noting that the above tells us that we are at extremes and hindsight will tell us that a move to cash in early January would have represented a salient New Year’s Resolution so far this year. Last Monday every constituent of the S&P 500 was in negative territory at some point (first time since 1996), and the wider New York Stock Exchange advance/decline ratio was the most negative since 2007. The moves over the weekend in riskier ‘assets’ such as Bitcoin (-70% from record high) also suggest sentiment is now negative in the extreme.

What does history tell us at this juncture?

Firstly, do we know when equities will start to rise significantly again? No, we don’t. But there are some things we do know. We know that there is technical overselling. We know that negative sentiment is extreme (Bull/Bear Spread). And we know that valuations are now below ten-year averages (Global P/Es). We also know that if you had stuck with stocks after the first 25% fall in 1970, 1974, 2001, and 2008 you would have been back in positive territory in between two and five years.

This is all very easy to note ‘ex-post’, and the price of admission to this point has been double digit declines across multi-asset funds so far this year. But the declines experienced by some investors in certain risk assets (single ‘meme’ stocks, cryptocurrencies) do not in general represent the returns experienced by those who engage with a financial advisor.

Markets may have ‘changed’ in the short term, but if a person’s circumstances haven’t it is highly probable that the plan, fund choice etc, at the start of the year continues to be the right one. It is also known that even in a world of rising interest rates; real returns are still negative – and are lower than they were at the start of the year. Inflation is decimating the purchasing power of money held on deposit more than any time this century. This is a crucial point for investors looking to save for the longer term. Whether for pension, child’s education, or a rainy-day fund.

Equity markets are under pressure, inflation remains hot, and interest rate policy continues to heat up. However, in scenarios such as this, those with cool, calm heads will prevail. This can be achieved by people engaging with their advisor, sticking with their financial plan, and recognising that the price volatility experienced whilst investing is the admission price for long term investment returns. 

Protect Your Salary

The main purpose of Income Protection is to provide a regular income if you are unable to work for a period of time due to an accident or illness.

Depending on your employment type and circumstances there are some variations of this policy available. They include Personal Income Protection, Executive Income Protection and Wage Protector. You can claim tax relief on the premiums you pay at your marginal rate of tax. For example, if you are taxed at a 40% tax rate, on a €100 premium you will get €40 tax relief, with the cost to you being €60.

When focusing on Personal Income Protection, we sometimes hear the following comments;

“The state will see me through” – The state illness benefit is currently €208 per week (single persons allowance 2022) and if you are self-employed, you are not entitled to the state illness benefit.

“It won’t happen to me” – The average age of income protection claimants in one particular protection provider in 2021 was age 48, with their youngest claimant aged 22.

“I can rely on my savings” – The average duration of an income protection claim is 5 years meaning a savings pot of up to 5 years’ salary would be needed in order to cover a similar amount.

“I already have specified illness cover” – Income protection is designed to protect your earnings throughout your working life. If at any point you suffer an illness or injury, which stopped you from working, you would still have some form of income until you are medically fit to return to work or you reach the end of your benefit period. This is in contrast to Specified Illness cover which pays a cash lump sum should you suffer one of the illnesses covered by the policy. The most common income protection claims are for psychological issues and orthopaedic conditions. Whilst these conditions can stop you from working, they are unlikely to trigger claims payments from a Specified Illness policy.

Depending on the protection provider, some other benefits can include;

• Partial Benefit - If you return to work earning less than before you may be eligible for a partial payment.

• Hospital Cash Benefit - Daily replacement income if you’re in hospital for more than 7 days during the deferred period.

• Relapse Benefit - Benefit will immediately restart if you return to work after a claim and have a relapse within 6 months.

Whole of Life Insurance… does what is says on the tin!

Whole of Life Cover is a life assurance policy that lasts for a whole lifetime and is not limited to a specific term.

What are the benefits of this type of policy?

If you pass away this policy will provide a cash lump sum payment to your family. This can be used to cover funeral expenses or for settling outstanding debts. In the event of a definite terminal illness diagnosis, the full life cover payment can be made straight away to the policy owner to help with ongoing bills and expenses.

It can also provide tax-efficient inheritance planning cover for your family once it is set up as a ‘Section 72’ life policy. They may be liable for inheritance tax which can be a massive burden at an already difficult time. Inheritance tax is payable to the Revenue Commissioners when the value of the assets inherited is higher than a certain threshold. Depending on the assets being inherited, they may need to borrow money or sell a part of their inheritance in order to cover a potential tax bill.

There are optional benefits that can be chosen when setting up the policy which are dependent on the provider you choose. For example, Royal London provide an option to include a Life Changes feature which means if you stop paying premiums after your policy has been in place for at least 16 years, you can receive a cash amount back or have a guaranteed amount of life cover remaining for the rest of your life.

How do I set up a policy?

Whole of Life cover can be taken out by anyone aged between 18 to 74 years and the cover is for the rest of their life. A financial advisor can help you determine the level of cover you need depending on your circumstances and your dependents. Once the application is accepted, you then pay a set amount on a regular basis which is usually guaranteed never to increase (unless you choose inflation protection/indexation as an additional option).

When you are considering the cover you need, you should take account of

• any other loans and bills

• the income your family will need to live on

• any funeral expenses

• any inheritance tax bill that may arise when you die

A sample quotation for a non-smoking couple aged 43 and 44, for Dual Life Cover of €30,000 each (including the Life Changes option as above, without indexation) works out at €66.51 per month.

(Quote as of May 2022)