Annuities as a part of early retirement plan

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tk_maj

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While working on my early retirement plan, I was advised to look into annuities as a replacement for bonds/cash in my ARF portfolio.
I.e. buy annuities with a portion of my pension fund and the rest invest fully in equities via ARF.

A sum of 350K in annuity with 10 year guarantee would provide me (male, age 58) with an annual income of about 16K.
It sounds as a viable option, especially considering that my state pension will only start in 8 years.
Although I might go for a smaller allocation - e.g. 225K for an annual income of about 10K.

Quick search on AAM shows that the most recent thread on this subject is about one year old.
This 2-years old thread has some interesting info.
Especially this reference:
Marc said:
www.linkedin.com

Annuities get a bad rap, but is it time to look more closely?

Joe is 66 and just retired. He and his wife Mary are now in receipt of their State Pensions which come to about €24,000pa combined.
www.linkedin.com www.linkedin.com
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What is the current view on annuities in general, especially in case of early retirement?

Also, are there any tax implications that have to be considered in relation to income from annuities?
For example, as far as I know, my ARF fund would be excluded from means-test for my wife's dependent person pension.
Would be annuity income excluded too?
 
What does your PRSI record look like? Do you have 40 years’ worth of contributions?

Drawdowns from an ARF (before you’re 70 or before you are in receipt of a State (Contributory) Pension) are subject to PRSI Class S and qualify for additional “stamps”. Annuity payments are not subject to PRSI.

In general, annuities represent far better value. IMO, later in retirement.
 
As of now I have around 1300 PRSI contributions (25 years). Therefore I plan to keep part of my funds in ARF and take annual withdrawals (even before I am 61) to qualify for some additional contributions.
 
I’m generally not a fan of annuities as they are very much like a state pension in nature. Most people get a full or newly-full state pension and they don’t need to double up.


tk_maj said:
Would be annuity income excluded too?
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No. It is very much means.

Having read your other thread, I would just keep funds in ARF from 58 and draw down as needed. Your lifestyle is very modest and your pension fund is large enough for you to take a high-risk strategy with better expected returns.
 
I’m far from an expert on social welfare entitlements but aren’t the (non-jointly held) assets/income of a spouse disregarded for the purposes of the dependent spouse’s pension means test?

I wouldn’t be so down on annuities- they can definitely play a role. I would just be slow to purchase an annuity (particularly a joint life annuity) as young as 58.

Another thought - would it make sense to divide the pension pot into two PRSAs, retire one at 58 and leave the other alone until you hit 70 with a view to buying an annuity at that point?
 
Sarenco said:
I’m far from an expert on social welfare entitlements but aren’t the (non-jointly held) assets/income of a spouse disregarded for the purposes of the dependent spouse’s pension means test?

I wouldn’t be so down on annuities- they can definitely play a role. I would just be slow to purchase an annuity (particularly a joint life annuity) as young as 58.

Another thought - would it make sense to divide the pension pot into two PRSAs, retire one at 58 and leave the other alone until you hit 70 with a view to buying an annuity at that point?
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Or just use funds from the ARF to buy the annuity
 
Warning: I am an idiot with no experience whatsoever and everything I write is likely wrong. Figures calucated by ChatGPT which is also an idiot (sometimes).

I plan on living off my own modest investments from 55 - 65, accessing my private pension at 65 and opting for an ARF. At that point I will consider selling off what remains of my personal portfolio for an annunity to simplify my life. It will depend on 1) The actual value of my portfolio at that time, 2) my health and appetite for managing my own affairs, 3) the rates on offer.

I think annunities definitely have a role to play but companies of course need to make a profit and will not give you the full value of your money. 350k invested into an ETF would need to earn 7.5% return each year to pay you 16k after exit tax of 41%. The FTSE All World index has an average yearly return of 6-8% while the s&p is around 9.5%.

But my understanding is we pay tax on annunities. If so, that 16k will become more like 12k a year or 3.4% real return on your 350k each year.

2. Annuities​

Annuities are the alternative option to ARFs and are single premium insurance policies where, in return for some or all of your pension fund, a life assurance company will guarantee to pay you a specified amount of income every year until you die.
Like with ARFs, the cash payments you receive are treated as income and, as such, are liable to income tax, USC and PRSI (where applicable) and tax will be collected by the annuity provider via the PAYE system. To read more about annuities, check out the relevant section in our article here.

nationalpensionhelpline.ie

Taxation of Pensions in Ireland - National Pension Helpline

In this article, we’ll be taking a holistic view of the taxation of pensions in Ireland.
nationalpensionhelpline.ie nationalpensionhelpline.ie
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And I guess that 10 year fixed means its not adjusted for inflation each year? You might be losing 2-3% each year compounded.
  • At 2% Inflation: €12,000 in ten years will be worth approximately €9,844.76 in today's terms.
  • At 3% Inflation: €12,000 in ten years will be worth approximately €8,918.87 in today's terms.
I also think state pension schemes are in trouble across the entire EU and in my planning I choose to assume the worst case of the state pension not being available.
 
jpd said:
Are you sure?

There certainly used to be
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Fortune is correct. You are not able to purchase an annuity with non pension money in Ireland. In all my time working in this industry, I have never set one up for anyone. I did look into doing one about 10 years ago and no one did them.

Back to the OP, a 10 year guarantee? Is there a need for a 58 year old to have such a long guarantee? It will just reduce the amount being paid to you.

And while annuity rates are certainly better now than before, a 58 year old won't get a great rate based on the length of the estimated pay out. You can always invest in an ARF and then purchase an annuity through it later (not every life company will offer this).

Annuities should always be looked at as part of anyone's retirement options. In reality, most people invest in ARFs.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
theObserver said:
I choose to assume the worst case of the state pension not being available.
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Utterly daft assumption. State pension may be lower in real terms but it will always exist.

Sarenco said:
In general, annuities represent far better value. IMO, later in retirement.
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I agree. A lot of the cost of buying an annuity at 58 is paying for the probability that you’ll live for another 40 years.

At age 70 your life expectancy is both shorter and less variable so annuities are cheaper.
 
Thank you all for your feedback!

It seems that overall conclusion is that:
  1. Annuities might be a viable option as a part of a pension portfolio,
  2. It is better to buy them after the age of 65 (or even 70),
  3. A decision to buy will depend on their cost at that time
  4. In addition to financial reasons, the decision should also consider that annuities will be easier to manage ( vs ARF)
I will keep this in mind while working on my retirement plan.
 
I think that’s a fair summary and your fourth point, in particular, is very well made.

There’s no doubt that a known, dependable, sum dropping into your current account every month has a real value.
 
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