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Annuities
Questions
QuestionsWhat is an annuity?
The term "annuity" means a series of payments made at stated intervals until a particular event occurs. Usually, an annuity ends with the death of the holder but it can be designed to be paid during the lives of more than one person. It is normally secured by payment of a single premium to an insurance company. An annuity that is to come into payment immediately after it is bought is known as an "immediate annuity".

Is an annuity the same as a retirement annuity contract?
No. A Retirement Annuity Contract (RAC) is mainly designed for the self-employed and for those who are not in pensionable employment to enable them to accumulate funds to provide for their retirement. The benefits secured are available in the form of a capital sum. This is paid partly in cash to the holder of the RAC. The balance may be used to buy an annuity, although other options are also available.

What is a deferred annuity?
This is an annuity, whose payment is postponed until some time after it is bought. The most common use for a deterred annuity is to secure a preserved or a deferred benefit for an individual who has left the service of an employer, or in a case where a pension scheme is being wound up. These contracts are often called "Buy-Out Bonds" or Personal' Retirement Bonds (PRBs) and are referred to in the Pensions Act as "approved policies". The pension benefits secured by these policies normally are expressed in the form of a capital sum to be paid at retirement date and this capital is then used to secure an immediate annuity.

Must an annuity be bought when I retire?
If you are a member of a large defined benefit scheme, it is quite possible that an annuity will not be bought. The decision to secure your benefits by buying an annuity is an investment decision for the trustees of the scheme. However, if you are in a smaller scheme funded by an insurance contract, an annuity must be bought. If you are in a defined contribution scheme, an annuity will almost certainly be bought for practical reasons. Annuities bought in this way are called "Compulsory Annuities". The reasons for buying these annuities arise from tax law and because an annuity is the most certain way of guaranteeing that a pensioner will receive an income for life. Following the 1999 and 2000 finance acts, self-employed people, proprietary directors and holders of Additional Voluntary Contributions have additional options open to them and may be able to choose not to buy an annuity.

Must an annuity be bought from an insurance company?
Yes. Under European regulations, an annuity is classed as life assurance and can only be bought from a company licensed as a life assurance company.

Who Buys an Annuity?
An annuity bought with the proceeds of an occupational pension scheme is bought by the trustees of that scheme. A person who has a Retirement Annuity Contract is the purchaser of an annuity bought with the proceeds of such a contract.

Are Pension Scheme Death Benefits Used to Purchase Annuities?
Any part of a death benefit under an occupational pension scheme which cannot be paid as a cash sum must be used to provide a pension for one or more of the dependants or beneficiaries of the deceased scheme member. An annuity will usually be purchased by the trustees to provide such pensions.

Is it possible to buy an annuity with my own money?
Yes. An annuity bought with your own money is called a "Purchased Life Annuity". This is usually bought by someone who wishes to guarantee a certain level of income for as long as they live or die. These annuities can be quite tax effective.

When an annuity is bought does it cease to be paid when I die?
That depends on the terms chosen by the purchaser. It is possible to buy an annuity that is paid simply for your own lifetime, It is possible to incorporate a minimum guaranteed period of payment, so that the annuity continues to be payable for a fixed period, whether you live or die. Should you survive longer than the fixed period, the annuity would continue to be paid. It is also possible to buy an annuity which continues to be paid to a dependant after your death. The conditions of an annuity policy bought by the trustees of an occupational pension scheme must reflect the rules of that scheme.
Questions
When an annuity is bought, is the amount fixed for my lifetime?

Not necessarily. Again this depends on the terms chosen by the purchaser. You can buy an annuity which is payable as a level amount throughout your lifetime, or one which increases during payment at a fixed percentage.

Do I have any say in the kind of annuity that is bought?
If you are a member of a defined contribution pension scheme, you will generally have a choice as to what features are incorporated in your own annuity contract. Thus, you will be able to decide for how long the annuity payments will be guaranteed, whether they revert to a dependant after your death, whether they remain level or increase during payment. The important thing to remember is that each different variation has a cost attached and this means that your own personal pension will change, according to the options that you select.

Do I have a say in where my annuity is bought?
If you are the holder of an RAC, you may choose the insurance company from which the annuity is bought. If your annuity is being bought from an occupational pension scheme, the responsibility is solely with the trustees in a defined benefits scheme. Remember, in a defined benefit scheme the cost to the scheme of buying the annuity will not affect your benefit - that is promised. In a defined contribution scheme, the trustees may very well consult you on the choice of annuity provider. However, you have to remember that the eventual responsibility for buying the annuity remains with the trustees.

What influences the decision to use a particular insurance company?
Generally, the trustees will be looking for the best value for money that they can get - the rate that is available on the date your annuity is bought will remain in place for life. However the trustees must also take other considerations into account, such as the standard of service that you can expect from an insurance company, as you will expect your pension to be paid on time.

How often will my annuity be paid?
Annuities are generally paid monthly. If the rules of your occupational pension scheme specify monthly payment in advance, then the first instalment is due as soon as the purchase price is paid. If the pension is to be paid monthly in arrears, the first instalment will be paid a month after the annuity is bought. Depending on the administration arrangements of the insurance company concerned, an annuity may be paid precisely on the same day each month after it is bought, or, in some cases, on the first day of each calendar month. It is possible, particularly if an annuity is quite small, to arrange for it to be paid less frequently than monthly - for example, quarterly, half-yearly or even annually.

What form do annuity payments take?
The most common method of paying annuities is still by cheque, posted to your home on a monthly basis. Some pension schemes will be able to arrange for payment to be made to your own bank account by direct lodgement. It is most unusual for annuities to be paid in cash.

Are annuities subject to tax?
If an annuity results from your membership of an occupational pension scheme, then the annuity payments are subject to the normal tax deductions under the PAYE system. However you do not pay full PRSI on your pension, but only Class K contributions which are currently at the rate of 2%.

If you bought a "purchased life annuity" (i.e. with your own money) part of each instalment will be paid tax free. The remainder will be taxed at the standard rate of tax. If your tax rate is higher than the standard rate, you will have to pay the difference. Likewise, if you have an overpayment of tax at the year end, you will be able to recover any amount overpaid.

Annuities bought by the self-employed will continue to be taxed as the self-employed person is taxed. Tax is normally deducted at source by the Life Assurance Company at the standard rate and the taxpayer must pay the difference if he or she is liable for higher rate tax.

What is the tax position if I go to live abroad?
Generally, it is possible for the trustees or administrators of a pension scheme to get permission to pay an annuity to a person living overseas without deducting Irish tax. This depends on where you are living, and whether there is a double taxation agreement in force between that country and Ireland. You should make enquiries when the annuity is being set up, or when you decide to leave Ireland, if that is later.

My pension has a "Guaranteed Annuity Option" - what is that?
In the past, it was quite common for pension policies, particularly "with-profits" ones, to guarantee the annuity rates at which capital could be applied to buy a pension at retirement. When interest rates are very low, some of these guarantees will be extremely attractive. Before you, or your pension scheme trustees, come to any conclusions as to where a pension will be bought, it is advisable to check the wording of each policy document, to see if there are any guarantees attaching in terms of annuity rates. If there are, it might be best to leave the benefits exactly where they are and purchase the pension from the holding insurance company. This is an area in which professional advice should be obtained.

What happens to the balance of the purchase money if I die soon after the annuity commences?
Once an annuity is bought, the purchase price is always retained by the insurance company. This does not have to mean that nothing at all is paid to your surviving relatives or dependants. Annuities can be arranged to include a minimum guaranteed payment period. They can also be arranged on a "joint life" basis, which means that payments would continue to be made to another person after your death.

What is an impaired life annuity?
There is a limited market in this type of annuity. If an individual is not in normal health for a person of their age and sex, some insurance companies may be prepared to offer a better annuity rate, simply because there is the possibility that they might not have to pay out the annuity for the "average" expected lifetime. If you are not in perfect health at the time your annuity is being bought, it is advisable to have this option investigated.

Where I have a choice, is an annuity good value?
There is no simple answer to this question. At its most obvious, if you live for a very long time after buying an annuity, the payments, which are guaranteed for your lifetime, will represent very good value. If you buy an annuity when interest rates are very low, you will receive payment based on these low interest rates for life. Therefore, if interest rates rise after you buy the annuity, you may see it as poor value for money compared to what might then be available. If your main priority is to make sure that some of the capital passes to your surviving spouse or children on your death, an annuity will not be the best way to achieve this. It is very important, if you have a choice whether to buy an annuity or not, that you get very detailed advice based on your own circumstances and priorities before you make a decision.
Annuities