An annuity is a contract with a life insurance company that will pay you a guaranteed, regular pension income for life in return for a capital sum. The capital sum comes from your retirement fund. You will pay income tax and Universal Social Charge (USC) on the income that you receive.
The amount of regular pension income you get depends on a number of things such as:
- The amount of money from your retirement fund that you invest in the annuity
- If you are male or female
- The type of annuity you want
- Your age and state of health when you buy the annuity
- The percentage of your investment that the life insurance company agrees to pay you as a regular pension – this is called the ‘annuity rate’
Before buying an annuity, you need to decide:
- Do you want part of your pension to continue to be paid to one or more dependants after you die?
- 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:
- An escalating annuity – an annuity that increases each year or
- 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
- 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
- Once you invest in an annuity, you will not need any more investment advice in relation to it
- You don’t need to worry about investment risk as your income is guaranteed
- You pay lower charges than with an Approved Retirement Fund (ARF)
Disadvantages of annuities
- Once you take the pension, your income level is fixed or indexed to an agreed amount per year and can’t be changed afterwards
- If you choose a level pension, or one that does not increase each year, inflation will reduce its value during your retirement
- The annuity rate is fixed the day that you buy the annuity, so you won’t benefit from any later increase in annuity rates
- If you die early and your annuity income is just for your own lifetime, the money you used to buy the annuity does not go to your dependants – basically, your annuity dies with you
Remember you, or the trustees of your employer pension scheme, can shop around for an annuity and you might be able to get a better annuity rate.