Sunday 30 April 2017

Six steps to buying a pension that will pay you thousands of euro more

'Many people don’t realise that they don’t have to buy an annuity from the company they’ve been saving their pension with over their working life — and so end up settling for a much smaller pension than had they shopped around'. Stock photo.
'Many people don’t realise that they don’t have to buy an annuity from the company they’ve been saving their pension with over their working life — and so end up settling for a much smaller pension than had they shopped around'. Stock photo.
Louise McBride

Louise McBride

Many people are losing out on several thousand euro - or more - in their retirement because they have bought pensions which offer bad value for money.

The pensions, known as annuities, are typically bought when you retire - using the money in your pension pot.

Many people don't realise that they don't have to buy an annuity from the company they've been saving their pension with over their working life - and so end up settling for a much smaller pension than had they shopped around.

Many of the companies which sell annuities are not clearly explaining to consumers that they have a right to shop around for these products, according to a recent Central Bank probe into the sale of annuities.

"Consumers have the right to purchase an annuity from any provider," says Bernard Sheridan, director of consumer protection with the Central Bank.

You could lose out on €355 a year in pension income if you don't shop around for an annuity - assuming you have €50,000 to buy one, according to the Central Bank probe. So failing to shop around could cost you €7,000 in lost income over your retirement - assuming you live for another 20 years after you finish work.

And should you have a sum running into the hundreds of thousands to buy your annuity, choosing the wrong one could cost you tens of thousands of euro in lost income.

Your choice of annuity can have a major impact on your income in retirement - so how do you choose the right one?

First, shop around annuity providers to get the best rate. That rate could be around 4.5pc - though it will vary. You can work out the annual pension you'll get by multiplying the rate by the sum of money you are using to buy your annuity.

For example, an annuity rate of 4.5pc would get you an annual income of €4,500 if you have €100,000 to buy your annuity; a rate of 5.2pc would get you an annual income of €5,200.

Shopping around is particularly important for those with personal pensions.

"If you are in an occupational pension scheme, the trustees should have already searched the market for you - to get the best annuity rate," says Jerry Moriarty, CEO of the Irish Association of Pension Funds (IAPF).

Second, understand what will reduce - or boost - the income you get from an annuity.

"Things like your age, the size of your pension fund, any underlying medical condition, any provision you are making for your spouse, and indexation (which protects you against inflation) will impact the annuity rate you get," says Mark Reilly, Aviva's annuity expert.

Third, find out if you qualify for an enhanced annuity. An enhanced annuity could pay you a higher pension income than a standard annuity does - but you must have a history of ill health or an underlying medical condition to get one.

An enhanced annuity could put €60 a month more into your pocket than a standard one does - assuming you have €100,000 to buy an annuity.

"With enhanced annuities, we have a better understanding of your life expectancy and we can feed that into your annuity rate," says Mr Reilly.

Aviva and Irish Life are the main providers of enhanced annuities here. But if you're in good health, you're unlikely to get one.

Fourth, buy a guaranteed annuity rather than an annuity without a guarantee - particularly if you have family. With a guaranteed annuity, your pension will continue to be paid to your estate for a certain amount of time - even if you die shortly after buying your annuity.

Guaranteed annuities typically offer a guarantee for either five or 10 years. They are more expensive than annuities that don't come with a guarantee - but they offer peace of mind and help ensure that you get something back for all the years you have spent paying into a pension.

Fifth, get advice. Pensions are a complex area; annuities even more so. "A good broker or adviser will have access to all the companies who are doing annuity business," says Mr Reilly. "Ask him for a list of the companies that are offering annuities - and a list of the rates they're offering."

Sixth, consider the alternatives.

When interest rates are low - as they are now - it is expensive to buy annuities. Instead you might consider putting your money into an Approved Retirement Fund (also known as an ARF - a personal retirement fund where you can keep your money invested after retirement, as a lump sum). But you should understand the downsides first.

"Although the interest rates on annuities are low, annuities give people the certainty of an income," says Mr Moriarty. "With an ARF, investment values will go up and down." The money in an ARF could also run out before you die.

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