Pensions can be complex products, so it is important to get the right financial advice. 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.

The WALLACE Financial Guide to understanding Annuities

Pensions can be complex products, so it is important to get the right financial advice. 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.  It is fair say today that annuities are less popular today, they offer less value than they did in the past

How much of a regular pension income could I expect from an annuity?

This depends on a number of things, such as:

  1. the sum of money that you invest in the annuity
  2. whether you are male or female
  3. the type of annuity you want
  4. your age and state of health at the time of buying the annuity
  5. 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:

  1. Do you want part of your pension to continue to be paid to one or more dependants after you die?
  2. Do you want a pension income that will increase regularly, or one that stays level?

The income you get from your annuity will be less if you choose:

  1. an escalating annuity – an annuity that increases each year or
  2. 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