What is an Annuity?
An annuity is often referred to as a pension. This is the amount you expect from a retirement fund, but annuities are far more than a simple pension payment. They can be used for any purpose where an income is needed and come in various forms.
If you belong to a pension fund, pension preservation fund or retirement annuity, at least two-thirds of the benefit available must be reinvested in a life-long annuity. The only exception to this rule is if you are emigrating or if the amount available is less than a certain minimum. This minimum is set by government. The costs to run an annuity makes the annuity amount very important.
The compulsory annuities are classified as annuities for life or a fixed annuity. An annuity is a pension which is paid regularly to a retiree. Most pensions are paid monthly, but annual and quarterly annuities/ pensions are possible. A retirement fund may pay pensioners directly from the fund, e.g. under a defined benefit fund, the fund typically pays pensions/ annuities to retirees from the fund, as a minimum benefit applies as per the fund’s rules. A fund may also engage with an insurance house to provide annuities under their fund banner.
If a retiree themselves sources an annuity outside of the fund, all further obligations from that retirement fund towards the retiree ceases.
There are three main compulsory annuity products:
- Traditional/ conventional annuities;
- Living annuities; and
- Enhanced annuities
We explore each of these options so you can understand what to use. In many cases it is the best advice to use a combination of annuity types. A fixed annuity for life for the required essentials of life, such as living costs such as housing, food and medical. A living annuity can be used for the balance of the income required.
Annuities can be a financial planning tool. Sometimes it is best to hold of investing in a fixed or for life annuity, if interest rates are down and to go into a living annuity, waiting out the economic tides. Often if a person carries on working after retirement, this option may be a far more tax efficient one. Age plays a large role in choosing a fixed or for life annuity as does gender. It can often be very worthwhile to wait for a couple of years before going into such annuities.
It is very commonly advised for persons doing post retirement work to consider leaving the money in a retirement annuity until they need the income, allowing them to still receive any tax deductions for further contributions to the retirement annuity and also hold out for the improved rates they will receive if economic conditions improve, or as they become older.
A good financial planner can be a real asset as you look at annuities. However make sure you get one that specialises in the field and is not purely commission driven. Sadly many financial advisors do not understand annuities as a financial planning tool and move to commission based sales using only the blurb their financial product gives them.