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.

Reviewing Your Finances

Do you ever imagine what you would like to do in retirement or when your mortgage is paid off or even to retire earlier than you thought? Or, perhaps you are even just curious as to how your finances look right now?

Some questions and comments I regularly hear when I meet people for a financial review:

>  I know I should save into a pension, but can you explain why it’s better than saving into a savings plan?

>  What will my pension pay me at retirement?

>  I am in my 50’s… is it worth my while starting a pension?

>  Is it true I may be able to drawdown my pension when I am age 50?

>  I am self-employed, can I protect my income if I am unable to work due to illness or injury?

>  I have pensions from a previous employment, can I get access to them on any level or what can I do with them?

>  I think I have mortgage cover, but I do not know what it does, can you explain it to me?

>  Should I pay more towards my mortgage and if so, what change will it have on my term and interest payments?

>  I don’t understand how a life assurance policy payment affects me if my partner dies.

>  What is the difference between Leaving Service Options and Retirement Options?

Should a person wish to avail of this financial planning service, it involves a once-off fee and a simple 3-step process:

1.    You will receive a link to a budget planner where you fill in your personal and financial details. This is a comprehensive budget and will take up to an hour to complete.

2.    You submit the planner and I review and prepare recommendations and advice.

3.    We meet to discuss the results of your budget, your priorities and how you can better manage your money from a savings / pension / life assurance perspective.

Following this, you decide what step to take next. Having control, knowledge and confidence in making financial decisions can provide peace of mind. Either way this process will at the very least be an education to anybody who has no current strategy for retirement or savings needs.

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.