ARF vs buying annuity in current climate

As a 70 year old couple with one moderate annuity pension from work, one state pension( OAP) and one private ARF pension,we're wondering about converting the Irish Life ARF to an annuity. It's about €250k, reducing each year via withdrawal of 4%. We have no expertise in managing the ARF, but fear there will be very little or nothing left in later years, and at least there would be some guaranteed income with an annuity. Is it a good or bad time in current financial climate to look at buying an annuity?

This came up a few times recently.

Imputed distributions from an ARF actually increase to 5% from 70.

I think it’s fair to say that annuities represent a far better proposition today than they did a few years ago, particularly given your age.

Definitely worth a discussion with your broker.

Lucyfarr
Annuities have certainly become more attractive following the recent rise in interest rates. The attraction of Annuities is that they offer income certainty, but it does mean that you lose control of the capital sum.
If you buy a single life Annuity (based on one life only), you will certainly get an Annuity rate over 5% (more than the minimum drawdown from the ARF). If you go for a joint life Annuity the figures will be lower.
A important factor will be your state of health. If your health is good and family history is good, then an Annuity might be a reasonable bet. If not stick with the ARF.
If sticking with the ARF you need to consider your investment strategy. Investing in Cash (say) will generate a very low return and with a 5% drawdown, the net result will be a gradually reducing ARF pot. Taking a less conservative investment strategy might generate a better long term return but involves investment risk, which might or might not pay off.
You need to get professional advice and run the numbers.

Plus, annuities normally cease on death while an ARF can be inherited. The threads that I linked above go into a lot more detail on this and other relevant issues.

Lucyfarr said:

As a 70 year old couple with one moderate annuity pension from work, one state pension( OAP) and one private ARF pension,we're wondering about converting the Irish Life ARF to an annuity. It's about €250k, reducing each year via withdrawal of 4%. We have no expertise in managing the ARF, but fear there will be very little or nothing left in later years, and at least there would be some guaranteed income with an annuity. Is it a good or bad time in current financial climate to look at buying an annuity?

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Thank you Clubman, I should have spotted those,forgive me, I'm a newbie here

@Lucyfarr

You should be able to buy an annuity with 100% Spouses and get an annuity rate of circa 5.5% at the moment.

Gerard

www.pensionannuity.ie

thanks for all these replies, very helpful

@GSheehy previously posted this in another thread in case the annuity calculator linked there is of any use just for rough indicative purposes.

Many thanks

Sarenco said:

I think it’s fair to say that annuities represent a far better proposition today than they did a few years ago, particularly given your age.

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Or have rates just adjusted upwards in line with greater expected inflation?

Is there better value in inflation-adjusted terms?

If there is I’d be keen to see it.

We did a quote yesterday for a client and Irish life were 0.268% less than the leading provider in the market.

€268pa more for life for every 100k of pension from shopping around

Marc said:

We did a quote yesterday for a client and Irish life were 0.268% less than the leading provider in the market.

€268pa more for life for every 100k of pension from shopping around

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Just to be clear, I only linked to the post with the Irish Life annuity calculator because I believe that it's the only public one available and it was provided, as I stated, for rough indicative purposes. It wasn't an endorsement of Irish Life just in case anybody thought that it was.

I know this a 2-year old post however for new readers it is worth pointing out that the pensioner is withdrawing 4% from their ARF, and the fund reduces each year which indicates that the net investment return is less than 4%, which is very poor. Pension companies advise investing in low growth ARFs which typically have low volatility, however the client is guaranteed to get poorer each year. Irish annuities did offer an even worse return, but currently offer more than 4% with 2% annual escalation, or over 5% flat.
My retirement funding strategy is to remain invested in a 60% equities / 40% bonds pension fund right up to retirement, and at retirement invest in a in a 60/40 ARF investment till the day I kick the bucket. In addition, I have €340k of my pension funds in cash to be drawn-down on retirement as a lump sum.
As I have a state pension for the wife and I, and some other income, and a decent amount of cash, I can live with the higher year to year volatility of a 60/40 investment knowing that the long term return is significantly higher than the low performance funds recommended by pension providers who believe everyone rates year to year volatility before growth. Refer to the table found at this link for information on the 100-year performance of different investment mixes from 100% bonds to 100% equities. financialsamurai.com/historical-returns-of-different-stock-bond-portfolio-weightings/

Donal O'Keeffe said:

My retirement funding strategy is to remain invested in a 60% equities / 40% bonds pension fund right up to retirement, and at retirement invest in a in a 60/40 ARF investment till the day I kick the bucket.

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I've a similar view though a higher equity allocation (70%) and less in bonds (15%) and less in cash (7%). I feel i'm being conservative but also feel that equity markets (in particular the S&P500 and Nasdaq) are very overvalued at the moment so I'll wait for the inevitable 20-30% correction due sometime later this year before I rebalance to 80% equities. I'm not a fan of bonds in the medium term as I feel inflation in the US (with the rest of the world contaminated) is inevitable given current US government policies and that will depress bond prices (though raise their yields). It's not rocket science but best to target 5.5-6% returns per year to slow fund depletion given 4% withdrawal and 1.5%-4% inflation.

Hi Clubman. Here is Zurich’s annuity calculator.

It’s more sophisticated than IL in that it also models a comparison with an ARF.

When I bought my annuity New Ireland was offering the best rate which Zurich subsequently matched.

Had a look at the Zurich Calculator. Splitting 50/50 between an Annuity and a ARF might be worth looking at. Also, a flat rate Annuity is better value up to age 89, from that age onwards an indexed Annuity with 2% annual increase becomes a better performer. So, how long do you think you will live, and would you prefer a bit more cash when younger? Assuming an Irish OAP for oneself plus wife, plus a ARF, plus an Annuity, one can afford to select the higher risk / higher reward ARF investment strategy.

Something else; if considering retiring to France, according to the current DTA, the Annuity and Irish State OAP are Taxed in France, but the ARF is considered to be a "post retirement investment" and not a pension, and is always Taxed in Ireland. An ARF investment of €720,000 paying 5% or €36,000 per year would be completely Tax free in Ireland, assuming a married couple. Then there's the French Income Tax on the rest, but at a much lower rate than in Ireland. In France the Social Charges (PRSI) are greater than the Income Tax, the split could be about 60/40 Social Charges/Income Tax. When you present an Irish S1 form to the local French taxman, no Social Charges are payable in France (or any other EU country), and in Ireland, PRSI stops at age 66 years when State OAP entitlement starts.

I have not yet figured out if the French include an Irish ARF which is taxed in Ireland, in their calculation, does anyone know about that?

Interesting that it's the other way around in France. The Irish state pension is taxed in Ireland according to the Irish-German DTA. The income only affects the German Progression on your taxable income in Germany.