# Beginner's question: What you put in, comes out?



## whytis (25 Jul 2012)

Sorry for what might be a very sill question.

Just for example, let's say you pay €50,000 into your pension fund over your working life. That money will hopefully grow during that time.

When you retire:

Does the pension die when you die?
Or is the investment then part of your "estate"?

There may be more nuances here with state pension vs personal pension that I don't understand either. Sorry for not being able to better put the question.


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## Brendan Burgess (25 Jul 2012)

It depends

On retirement, you have two options

Option 1 - An Approved Retirement Fund
Your money is held in a fund for your benefit and paid over to you as a pension.

When you die, whatever is left in the fund goes to your estate.

Option 2 - You can buy an annuity with your fund on retirement. This guarantees to pay you €x per month for the rest of your life. If you die the following day, the pension company wins. If you live another 50 years, the pension company loses.
(You can vary this so that if you die within say 3 years, your estate gets some of the fund)


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## Gervan (25 Jul 2012)

> If you live another 50 years, the pension company loses.



As I understand it, the annuities offered now are 4% or 5%. In effect the pension company simply pays you the interest you could have earned on that sum as a deposit. They keep the capital.
If you had saved the same amount in a bank, you would have the same income, but the capital would also be at your disposal.
I do not think the pension company loses at all.


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## DerKaiser (25 Jul 2012)

Gervan said:


> As I understand it, the annuities offered now are 4% or 5%. In effect the pension company simply pays you the interest you could have earned on that sum as a deposit. They keep the capital.
> If you had saved the same amount in a bank, you would have the same income, but the capital would also be at your disposal.
> I do not think the pension company loses at all.


 
No. Annuities are constructed so that after the profit margin and expenses have been covered (usually a few percent of the money paid in) the average payments are set so that the average policyholder gets back the remainder plus whatever interest is being made.

The big issue at the moment is that the pension companies invest in very safe assets to guarantee the return of capital and that leaves very little interest. 

There is new legislation that will allow the pensions company to invest in less safe assets to generate more interest for the annuitant but leave them exposed to the risk of default.  These annuities will be very comparable in risk to a regular bank account, and when available it will enable appropriate comparisons between what Irish banks pay in interest and what you can get on an annuity with a pensions company.


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## whytis (25 Jul 2012)

Thanks all for the information, I really appreciate it. The main thing I understand here is that you have the _option_ to own the capital you've put in (with the question of how long you'll live) or an annuity (which will cover you for the rest of your life, but you won't have capital at the end, at least with the most simple of plans).

Just for context, is there one of the two options above from Brendan that is really more popular than the other? Or is it a mix, and depends on what the person wants to do?

And to add another variable to the mix: are these same two options available through a civil service pension?


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## Baracuda (26 Jul 2012)

There are several different annuity options, all have a guaranteed income period of at least 60 months, so if a person dies on month 30 therefore a further 30 months would be paid to that persons estate. Annuity's can be purchased for spouse's and dependants also. 

Some companies offer annuity investment protection e.g. person pays 100,000 for annuity which provides an income of say 5,000 p.a. and then after 6 years die's, then 30,000 would have been paid as income and the remaining 70,000 would be paid to the estate. Other companies offer an annuity rate at inception and then invest the capital in their managed funds. The advantage of this is that they can take lump sum withdrawals at any time which will reduce their annutiy rate pro rata. When a person dies they take the total income from the current value of the investment and pay this to their estate.


With an annuity the investment company bears the risk of a person living beyond average life expectancy and therefore annuity's merrits should be considered carfully especially if a person has no other source of income apart from social benefits.

AMRF/ARF

Proving very popular over the last few years with the introduction from life companies of self invested/directed funds. Rather than the life companies directing your money into their funds, you can elect to invest your money directly into Gov Bonds or bank deposits where you get perhaps 4 to 6% p.a. gross of charges over 4-6 year term. Other companies will have their own deposit fund and bond funds available also which may have similar returns.

The advantage of this kind of arrangement is that you retain control of the capital and you could take an income after charges of say perhaps 4% whilst not withdrawing any of the capital. Using 100,000 as an example 4% net of charges would provide an income of 4,000 p.a.

With this option the investor bears all the risk and should the bank or bond provider not be able to repay the deposit or bond the investor may loose some or all or their investment. This is a very real risk as it should be noted that several euro zone countries have let banks go to the wall over the years!


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## Baracuda (26 Jul 2012)

whytis said:


> And to add another variable to the mix: are these same two options available through a civil service pension?


No this is not an option to CS as there is no pension fund value per say as pension costs are funded directly through taxation.

You would have this option with personal AVC contributions


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