Tuesday 6 December 2016

My wife has been offered a measly annuity: must she take it, or has she other options?

Gerry Stewart

Published 04/09/2016 | 02:30

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'. Photo posed
Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'. Photo posed

My wife, who will be 65 in a few weeks, has a Personal Retirement Savings Account (PRSA) worth around €55,000. Her PRSA provider has told her it will give her a quarter of her PRSA in cash and then pay her an annuity of €1,541 for life. (This has been reduced from €1,757 in the last few weeks).

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This means that she would have to live until around the age of 92 in order to draw down the balance of the fund. The average age of a female in Ireland is 82. I believe this offer is unreasonable, and the annuity payment should be higher - based on the average life expectancy.

Can my wife improve the annual pension she will get on retirement so that it is more reasonable than what her PRSA provider is suggesting? Also, what happens to the balance in her PRSA if she dies soon after retiring?

Michael, Clonakilty, Co Cork

After allowing for the one-quarter tax-free lump sum you mention, your wife has been quoted a pension annuity rate of 3.73pc - down from 4.26pc "in the last few weeks". If your car or house insurance quote changed this much in a few weeks, you would look for another quote from another provider. Your wife should do the same and seek other annuity quotes from other life assurance companies.

Unlike car insurance, she only gets one chance here because once you agree to purchase an annuity, the annuity rate is set for life.

With an annuity purchase, there are lots of options available to your wife including benefits such as a guaranteed period, inflation protection and a spouse's or dependant's pension. All of these affect the annuity rate so again, shop around and seek a variety of quotes. You are correct in terms of life expectancy and this is one of the big downsides with annuities.

On death, the annuity income is only payable for any remaining guaranteed period (typically five or 10 years) and the annuity income dies thereafter - unless your wife purchases a spouse's or dependant's annuity at the outset. So if your wife died prematurely, she or you may not recoup the balance of the fund left in an annuity.

Your wife is lucky that she has other choices - hence the need for independent advice. She should be offered a large number of retirement options in addition to the annuity quotes you mention. Most commonly, retirement options include 25pc (one quarter) of the fund as a tax-free lump sum and the balance can be used to buy an annuity (as you describe above) which provides a guaranteed lifetime pension income.

Another option for the balance of her fund is to purchase an Approved (Minimum) Retirement Fund (AMRF/ARF) which can provide a pension income - an income which is not guaranteed, however. So the annuity income is guaranteed whereas the AMRF/ARF is not.

You can also have a combination of both annuity and AMRF/ARF. As the AMRF/ARF income is not guaranteed, there is a level of risk associated with the AMRF/ARF but your wife can choose a level of risk that she is comfortable with. The AMRF/ARF can provide a taxable income of 4pc or more per annum but there are rules depending on your wife's age and if she has other pension income so get advice.

She may be able to choose a higher income than 4pc, however any income may erode your fund completely (called bomb-out risk) over time - hence the need for advice.

On death, the remaining value of the AMRF/ARF fund passes to your wife's estate as an asset. Your wife can switch her AMRF/ARF to a guaranteed annuity at any time but she cannot switch from an annuity to an AMRF/ARF.

I recently became self-employed after giving up a full-time job with a private employer. I had a good pension with the employer but had to leave the scheme once I started to work for myself.

I will be opening a PRSA shortly as I need to make my own pension provision now. I know I have the option of transferring my old pension into the PRSA but I'm not sure if it's the best move.

I am concerned about the charges I could be hit with. What's the best thing for me to do?

Patricia, Athlone, Co Westmeath

I WOULD normally ask clients to consider moving a company pension from their 'private employer' pension to a buy out bond (BOB) or personal retirement bond (PRB) for a number of reasons.

Firstly, control: A PRB or BOB is a pension investment in your own name - therefore you would own it and control the investment content rather than relying on the trustees of your former employer's pension.

Secondly, charges: A Standard PRSA has maximum charges of 5pc on the contributions paid and 1pc a year on the PRSA fund value. There are also non-Standard PRSA's with alternative charges and additional funds.

You could transfer your former employer's pension to a PRB or BOB at potentially much lower charges than a PRSA or the former employer's scheme.

Thirdly, access: PRSAs can be accessed between age 60 and 75 whereas a PRB or BOB will give you the choice of accessing the money from the age of 50 if you need to.

Fourthly, performance, risk and diversification: Choosing a different fund manager or managers for your PRSA, PRB or BOB will add fund manager diversification which can reduce risk. Performance is related to risk so you should complete a risk questionnaire to help you decide on a level of risk for your funds. Get independent advice to help you select a PRB or BOB - or a PRSA (should you go down the PRSA route). Get advice on funds too so that you keep your charges low.

Depending on whether you have started to work for yourself as a sole trader or a limited company, you may also want to consider a personal pension or company pension as an alternative to a PRSA.

I am debating whether or not to start saving into a pension. Up until now, I did not earn enough to get into the higher tax bracket and so I only ever qualified for pension tax relief at the standard 20pc rate of tax. I didn't feel it worth my while to start a pension for this reason.

However, a few months ago, my pay increased to €35,000. Even though I am still paying the standard rate of tax on most of my earnings - and the higher 40pc rate on a small portion of my earnings - can I still get a 40pc tax break on the full contributions I make to a pension from now?

Geraldine, Portmarnock, Co Dublin

Saving into a pension is essential whether you pay tax at 20pc or 40pc. A pension will provide you with more life choices when you retire.

For anyone born after January 1, 1961, the State pension only starts at the age of 68. For those born from January 1, 1955 and December 31, 1960, it starts at age 67.

Given that most people are forced to retire at the age of 65, what will they do for money from the age of 65 until age 67 or 68?

That is where a pension comes in. In your case, you will get tax relief of 40pc on all your pension savings even though only a small amount of your earnings are taxed at 40pc. You will also get tax-free growth on your pension savings as they grow.

Compare this to the 41pc DIRT which is deducted on savings interest in deposit accounts and pension savings make even more sense.

Finally upon retirement, you should get a portion of the pension fund back as a tax-free lump sum, typically 25pc. Three different tax breaks make pensions the best and most tax efficient form of long-term savings.

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

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