Traditionally, the value accumulated in your pension would be used to purchase an annuity at retirement. An annuity is an income for life purchased from a life insurance office. It converts the value saved during your working life to ongoing regular income paid for the rest of your life providing certainty in that your future income is guaranteed.
In general, when buying an annuity your broker will go to the market and find you the best available rate. This allows you convert the value saved in your pension to an ongoing income for life. This will be expressed in percentage terms. For example if you were quoted an annuity rate of 4%, you will receive an annual income of €4,000 for the rest of your life upon purchasing an annuity with €100,000.
Annuity rates at any given moment in time are linked to long term bond rates. In recent years these have been low and hence annuity rates have been low hence annuities have become less common and ARF’s more prevalent.
Certain older pension policies will have a guaranteed annuity rate included in its terms and conditions. This can be a highly valuable allowing you to convert your pension to an annuity at a substantially higher rate then that currently available in the market. Prior to retiring your scheme, your broker should check
Guaranteed periods, spouses benefits and indexation
When buying an annuity you will have the option of selecting certain additional benefits such as a guaranteed period where the annuity will continue to pay for a set period of time even should you pass away. You may also have the choice of adding a spouses benefit where by you can choose for the annuity to continue to be paid at least in part to a spouse should you pre-decease them. It may also be possible to elect for the benefit paid on your annuity to increase at a predetermined rate over time. Choosing an indexation option will ensure the spending power value of your money remains intact over time.
If you are suffering from ill-health at the time of your retirement, some providers will offer an enhanced annuity rate.
Purchasing an annuity through your Approved Retirement Fund (ARF)
It is possible to purchase an annuity through an ARF. This allows you to split divide your pension between an annuity and the certainty this provides to your future income and a market based investment to be drawn on over time for income which may ultimately offer better long term value.