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[Non-Profit Annuity] [With-Profit Annuities] [Unit Linked Annuities] [Inflation-Protected Pensions]
how annuities workHow Annuities Work

In a defined benefit pension scheme, the individual member has been promised a particular level of pension (such as 50% of salary or other similar formula), which must be paid for life. The trustees may have the option of deciding to pay this pension out of the ongoing income of the scheme.

Alternatively, they may decide to buyout their liability for these payments by purchasing an annuity on the open annuity market. They shop around to get the best conditions they can. They then pay the quoted purchase price out of the assets of the fund to the chosen insurance company' to secure the annuity payments.

In some cases, the actual instalments of the annuity will be paid by the insurance company to the trustees, who will then deal with the PAYE tax liability on it. In other cases, the trustees may, with the agreement of the Revenue Commissioners, ask the insurance company to pay the annuity directly to the pensioner and deal with the tax on their behalf.

The Annuity Quotation

In buying an annuity, the first thing the trustees must do is obtain quotations from different insurance companies. In order to obtain the quotation, the trustees of the pension scheme will give the insurance company details of the scheme member - date of birth, amount of pension required, and so on. If there is to be a pension payable to a dependant after the death of the pensioner, details of the dependant must also be given at that time. The rates on offer from the different companies vary from one life office to another and may change from day to day. When a quotation is given by a life office, however, it is usually guaranteed for a set period - 7 or 14 days being the most common. If you are offered an annuity rate which has a guarantee, you must accept the quotation within the set period of 7 - 14 days, otherwise it lapses and the whole procedure has to be gone through again.
types of annuity

Types of Annuity

Non-Profit Annuity

This is the most common type of annuity, which guarantees the future instalments and is not subject to any fluctuation due to investment conditions in the future.

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With-Profit Annuities

A with-profit annuity guarantees a lower minimum payment than you could expect to get from a non-profit annuity. However, this is increased by the addition of bonuses which are designed to reflect investment returns actually earned by the insurance company while your annuity is being paid. Although the assumptions made in relation to

these products are usually fairly conservative, it must be realised that there is still some risk to the pensioner as the bonuses will not be guaranteed.
Before buying these products, it is advisable to get written answers on the various questions that arise and to get professional advice before completing the purchase.

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Unit Linked Annuities

These give payments expressed as a fixed number of units in a fund being paid out each month. This produces a variable pension, because the value of the units may go up or down, depending on the investments that are in the fund. If the fund concerned experiences overall growth during the time the annuity is being paid, the instalments of the pension will tend to increase as the value of the fund's investment increases. However, you have to remember that there is no guarantee that fund values will always increase and there is a risk that they could also fall.

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Inflation-Protected Pensions

These are similar to guaranteed pensions and carry similar options in relation to dependants etc. The difference is that the rate of increase is linked to inflation rather than being a stated amount. Such pensions may be established:
(a) fully inflation linked
(b) inflation linked with a yearly cap of say 3% - 5%
(c) inflation linked with a long-term cap of say 3% - 5%

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