# How do I purchase an annuity?



## Tintagel (8 Nov 2016)

I have a separate AVC lump sum invested apart from my DB pension.

How do I go about purchasing an annuity using this?

Is there such a thing as a "list" of annuities that I chose from and how do I choose the right one that is performing well, has reduced fees and if I approach an independent broker, how do I know that I won't be steered in the direction of a big commission for him?


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## Merowig (8 Nov 2016)

Option A: a fee based Broker (and one who gets comission) and compare the results they produce.
Option B: Contact the different providers directly and ask
Option C: Check if a government agency has a list of providers (Central Bank or the Pensions Authority)


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## Tintagel (8 Nov 2016)

Merowig said:


> Option B: Contact the different providers directly and ask



Are these available online? Sorry I know I can Google this but I just thought that there might be a list of Annuity providers together with fees/costs/performance/reviews etc online.


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## Merowig (8 Nov 2016)

Couldn't find a list online either - the Central Bank or the Pensions Authority might have one or could compile one.


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## GSheehy (9 Nov 2016)

There's a summary of the options/terms on annuities here. It's an old post that I did but still relevant. 

The market for annuities is pretty limited and the main players tend to be Aviva, Irish Life, New Ireland and Zurich. Other companies 'dabble' from time to time but most of them just offer annuity rates to folk that have policies maturing with them.

Buying directly from the provider doesn't guarantee the 'best' rate. If you need advice on the purchase you have to pay for it. If you don't need advice (execution only), you'll probably be able to negotiate a fee or reduced commission structure from a discount broker - you have to tell the broker what company you want to buy the annuity with and what options you want with it.   

All annuity rates quoted will be current so there's no point asking what rates were like 5 years ago or will be like in a few months time.


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## Tintagel (9 Nov 2016)

Thanks. When you purchase an annuity are you purchasing a stock market type investment or a deposit type investment. Are there such things as high risk, medium risk and low risk annuities?  Does a person purchasing an annuity choose which option?


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## Conan (9 Nov 2016)

An annuity is a guaranteed income for life. You give the capital to the Life Company and in return they guarantee a fixed income (or an indexed income). Investment risk is not an issue for you.
You simply decide what type of annuity, e.g.
- a single life annuity payable for as long as YOU live (level or indexed)
- an annuity payable as long as you live but continuing to a surviving spouse on your death
- there are also optional benefits such as a minimum guarded payment period - eg 5 years

The essential point with an annuity is that you hand over the capital in return for a guaranteed income for life. The real "risk" is the longevity one. If you live to 100+ you will do well, if you die after say only 10 years then the Life Co. gain. So you need to consider what type of annuity you want to best suit your situation (married or single) and your state of health (family history). If you are in poor health then an annuity (even an impaired lives annuity) may not be the best investment. An ARF may be better (because on your death any capital remaining in the fund can form part of your estate). If however your life expectancy is above average, then an Annuity may be worthwhile. It offers income certainly without having to take specific investment risk.

If you already have a "guaranteed" DB pension, then the ARF route may be worth looking at so as to hedge you pension bets.

But I suggest you seek professional advice.


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## Steven Barrett (10 Nov 2016)

Different insurers offer different rates, so you need to shop around. There is no central place where you can get all of the rates offered by all insurance companies, you have to see what all the companies offer. 

The insurance company tells you at the outset what you are guaranteed to be paid. You don't worry about fund performance, that is the insurance companies risk. That is why they take a low risk approach and invest in long dated bonds, which currently give a low return, so the rate you get is also low. 

Indexed annuities usually take 25 years to pay out more than a level annuity (amount never changes), so you need to bear that in mind when buying an annuity. 

As Conan mentioned, an ARF may be worth considering. This is an investment like your AVC's, but you can access the money (and pay tax on any withdrawals). Unlike an annuity which is guaranteed for life, you are in control, so if you blow the money or invest badly, the money is gone. If there's still money in the pot when you die, it goes to your family. With annuities, the remainder is used to pay those who live too long!

Steven
www.bluewaterfp.ie


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## Tintagel (10 Nov 2016)

Thank you. O.K. Can I ask?  

 If I put €50k in an annuity with no strings or bells or guarantees attached, just on my own life at say 65, what would the expected return per annum be approximately?

If I put €50k in an annuity with a guaranteed 5 year payout on my life what would be the expected return per annum?

If I put €50k in an annuity with a guaranteed payout on me plus a payout to my spouse if I died, what would the expected return per annum be?

I am just trying to figure out how much the cost of the "additions/enhancements" will be to the payout. (Choosing Irish Life or similar).

I will come back to the ARFS once I get my head around annuities.

Thanks


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## Merowig (10 Nov 2016)

These questions should be asked the annuity providers.
Check your statement you reveceive from your prension provider - it has a projection should you buy an annuity.
Furthermore check the calculator here: http://www.pensionsauthority.ie/en/Calculators/Pensions_Calculator/


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## Steven Barrett (10 Nov 2016)

I need the following:

Are you a male or female
Your date of birth? 
Your spouse's date of birth? 
How much do you want your spouse to get of your pension when you die? Anywhere from 1% to 100%
How much is your AVC pot?


Steven
www.bluewaterfp.ie


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## Tintagel (10 Nov 2016)

Male Born 1952.
Spouse Born 1953
Spouse to get 50%.
€50k


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## Steven Barrett (10 Nov 2016)

See payouts below: 

If I put €50k in an annuity with no strings or bells or guarantees attached, just on my own life at say 65, what would the expected return per annum be approximately? *€1,947*

If I put €50k in an annuity with a guaranteed 5 year payout on my life what would be the expected return per annum? *€1,942*

If I put €50k in an annuity with a guaranteed payout on me plus a payout to my spouse if I died, what would the expected return per annum be? *€1,702


Steven
www.bluewaterfp.ie*


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## Tintagel (11 Nov 2016)

SBarrett said:


> If I put €50k in an annuity with no strings or bells or guarantees attached, just on my own life at say 65, what would the expected return per annum be approximately? *€1,947*



Thanks for that Steven.  So at age 85 (20 years later) I will have received circa €39,000 of my €50,000 investment and If I die during that period what happens to the capital sum?


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## Merowig (11 Nov 2016)

Tintagel said:


> Thanks for that Steven.  So at age 85 (20 years later) I will have received circa €39,000 of my €50,000 investment and If I die during that period what happens to the capital sum?


If you have an annuity which covers as well your wife she will get a part of what you got. If you bought an annuity just for yourself the money is gone.
ARFs are part of your estate. Annuities not.


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## Steven Barrett (11 Nov 2016)

If you die early, the money pays for those who live too long. If you life too long, you're quids in. 

With the ARF, you invest as like your AVC. You can invest in a range of different assets. You can take it all out in one go if you want or take the minimum of 4%. If you die early, your estate gets the ARF. If you live too long, you may run out of money. As you have a DB pension which is probably your main source of income in retirement, this may not be an issue anyway. 

Steven 
www.bluewaterfp.ie


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## Tintagel (11 Nov 2016)

Thanks. The annuity does not seem like a good deal at all. At 85 I haven't got my money back. It seems I only get my own €50k back by age 91.  
O.K. Can we have a look at ARFs.  Who do I approach to start one of these rolling?  Is it the same insurance companies or stockbrokers that deals with the annuities?
Can I purchase specific shares like CRH or Tesco or similar as part of my ARF and if so how quickly are the purchases executed?


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## Steven Barrett (11 Nov 2016)

Yes, insurance companies and stockbrokers offer them. You have to be regulated by the Central Bank to offer ARF's. You can invest in funds and you can buy direct shares too. Most insurance companies are funds only. The trades are placed when you ask for them. It's better to buy indexed funds that track the market. You get the benefit of diversification that is difficult to get when you are buying individual stocks. 

Also, do you put the research in before choosing what stock to pick or are you just taking a punt? 

Steven
www.bluewaterfp.ie


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## IsleOfMan (14 Nov 2016)

SBarrett said:


> See payouts below:
> 
> If I put €50k in an annuity with no strings or bells or guarantees attached, just on my own life at say 65, what would the expected return per annum be approximately? *€1,947*
> 
> ...



Why would anyone give their money to an Insurance Company and then wait over 20 years to get their own money back in annual amounts? If they die in the meantime they lose the entire amount. (Option 1 above).  Would it not be better to stick it in An Post Savings Certs and instead of getting €1900 per annum, get half this amount in interest. At least you retain ownership of the capital, interest rates might increase, you can spend some of it as needs be and you can leave it in your will to whoever?

Once you put funds in an annuity are you locked in?


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## Tintagel (14 Nov 2016)

SBarrett said:


> You can invest in funds and you can buy direct shares too. Most insurance companies are funds only. The trades are placed when you ask for them



Thanks Steven.  Back in the day I used a stockbroker to purchase shares. You would phone them up and maybe 3 days later they would have purchased the shares for you.

When the internet came along I had a different stockbroker. I would research my shares, have a look at the "live" price online, ring my stockbroker and execute the share there and then. I would actually see my purchase happen online. No waiting around.

I could have kept my costs down by trading online myself but I liked the idea of getting a share certificate in the post.

It concerns me somewhat that if I want the company holding my ARF funds to invest in a particular share they will be like the stockbroker of old and take forever to make the purchase.  For example. When Trump became president the price of CRH jumped by £4 + to £30.29 at it's highest point. Today it's £28.20 as I write. If I had contacted my ARF holder to purchase CRH on the day would they act immediately and make the purchase or do they take their time?  I would be interested in hearing about this side of things.

Do insurance companies or stockbrokers offer a better service and do both have similar costs?


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## Steven Barrett (14 Nov 2016)

IsleOfMan said:


> Why would anyone give their money to an Insurance Company and then wait over 20 years to get their own money back in annual amounts? If they die in the meantime they lose the entire amount. (Option 1 above).  Would it not be better to stick it in An Post Savings Certs and instead of getting €1900 per annum, get half this amount in interest. At least you retain ownership of the capital, interest rates might increase, you can spend some of it as needs be and you can leave it in your will to whoever?
> 
> Once you put funds in an annuity are you locked in?



Annuity rates are at historic lows right now, so they do represent very poor value for money. People purchase annuities because they don't want any investment risk on their money once they retire. They are content to know that no matter how long they live, they will receive a guaranteed income for the rest of their lives. With annuities, people always look at the "if I die early" scenario but not at the "if I live to long" one. If you live to be 100 years of age, you will still get your guaranteed payment. If markets crash like they did in 2008, it is no concern of yours as you have your guaranteed income and the insurance company has invested in low risk assets so the chances of a default are slim. 


Steven
www.bluewaterfp.ie


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## Steven Barrett (14 Nov 2016)

Tintagel said:


> Thanks Steven.  Back in the day I used a stockbroker to purchase shares. You would phone them up and maybe 3 days later they would have purchased the shares for you.
> 
> When the internet came along I had a different stockbroker. I would research my shares, have a look at the "live" price online, ring my stockbroker and execute the share there and then. I would actually see my purchase happen online. No waiting around.
> 
> ...



For the self directed ARF provider I use, the trades are placed immediately. 

Who offers the better service? It depends on what you want. Insurance companies tend to be more expensive, but the do have a range of different contract structures, some cheap and others expensive. The more expensive ones are where advisors take high initial commissions. 

Stockbroker or self directed accounts tend to have one charging structure that is more transparent. As there are no commission fees to be recouped, the fees are lower.  

Steven
www.bluewaterfp.ie


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## Tintagel (14 Nov 2016)

SBarrett said:


> For the self directed ARF provider I use, the trades are placed immediately.


That's good. Are all shares eligible to be included in ARFs? Are dividends reinvested or can the individual have the dividends paid out immediately?
How do you take money out of an ARF?


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## Steven Barrett (14 Nov 2016)

Most listed shares are eligible. You decide on whether to reinvest or take the income. You instruct your provider to make a withdrawal. All withdrawals are subject to income tax under PAYE. 


Steven
www.bluewaterfp.ie


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## Tintagel (17 Nov 2016)

Thanks Steven.  I read this online from the Irish Life webpage.   "One of the rules governing ARFs is that tax, Universal Social Charge and PRSI, if applicable, must be deducted as if income were taken, even if no income is taken in a particular tax year".

Even if I don't make a withdrawal, the above seems to suggest that I will be taxed anyway? Is it the whole amount that is taxed?

Must I take a minimum of 4% each year and is there any maximum that I can take?

If I purchase individual shares, must the dividends be reinvested back in to the ARF. In other words can the dividends be paid directly to me without going in to the ARF?

Finally. Could I close my ARF in year two and would there be any benefit in doing this?


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## Bronco Lane (21 Nov 2016)

Is it correct to say that you can take the investment GROWTH plus 4% from the ARF every year? Does this include dividends plus profits made from individual shares?


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## Steven Barrett (21 Nov 2016)

You can take whatever you want from an ARF. 

There is imputed distribution where you can take 4% of the value of the fund each year. If you don't, the Revenue will take their tax on the value of that 4% anyway. If you have an AMRF, you are allowed draw down 4% if you want but that is optional. It is not subject to imputed distribution. 

It is the value of the fund at the end of the year. If you have taken dividends throughout the year, this will be taken off the 4%. Most people invest in funds which re-invest the dividends anyway. 

Steven 
www.bluewaterfp.ie


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## Laramie (22 Nov 2016)

SBarrett said:


> If you have taken dividends throughout the year, this will be taken off the 4%



So it looks as if there are funds that will allow you to take the specific dividends each year but from the above comment by Steven it suggests that if you have an AMRF this is counted as part of the 4%?

I was thinking of picking a basket of shares with high yielding dividends. I would choose the shares myself. Is this a good idea or is there any specific fund that invests in high yielding "safe" shares. What I mean by safe are shares in the established Pharma and Utilities sectors.


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