When taking retirement benefits, you will usually be offered a choice between purchasing an annuity – a guaranteed pension for life or investing in an Approved Retirement Fund [ARF] and taking an income from the invested amount.
While many retirees might prefer to invest in the ARF, there are a number of instances where it might make financial sense to buy an annuity.
- Single persons with no dependants have a primary need to provide themselves with an income in retirement. They don’t need to provide for dependants and therefore don’t need to preserve retirement capital. An annuity will provide them with the guaranteed income they require and if they are in poor health, an enhanced annuity may yield a better income than a standard annuity.
- Retirees with small pension pots who have maximised their tax-free cash lump sums might find they’re left with relatively small pension funds, but not small enough to be drawn down under triviality rules, so an annuity might be an appropriate solution.
- To invest in an ARF, a person must have a guaranteed income of €12,700 pa. Retirees could use some of their pension money to buy an annuity to make up any shortfall and use the balance to invest in an ARF.
- Older pensioners who have become more risk averse and are seeking a more secure alternative might also wish to consider purchasing an annuity.
Annuities are lower risk than other retirement income options and will pay a regular income no matter how long you live.
You can provide an income for your spouse or civil partner when you die and the annuity can increase each year to offset the impact of inflation on your pension income.
Annuities can guarantee payments even if you die, for minimum terms of up to 10 years
However, once they’ve bought an annuity, you can’t cash it in, swap it for something else or alter the annuity options.
The level of your pension income is not flexible and depending on when you die, you may get back less than you paid in.
Anyone considering taking retirement benefits should seek qualified pensions advice.