What is an Annuity

What is an Annuity


The term “annuity” means a series of pension payments, normally monthly, until a particular event occurs. Annuities are normally purchased from a life company using your pension fund. You should think about taking advice when considering your retirement options, especially where you are buying an annuity.

If you are a member of a defined benefit scheme, you may never have to make a decision about buying an annuity as the trustees will pay your pension directly or buy an annuity on your behalf.

But for other pension arrangements, the purchase of an annuity may be one of the most important financial transactions in your life – certainly it is one with very long-term consequences. It is therefore important to understand how annuities work and the various options that may be available to you.

Many pension arrangements allow an “open market option”. This means that you may have a choice of going to any life assurance company regardless of where the pension fund itself was invested.
This is important as some providers of annuities are more expensive than others from time to time.
Always seek advice…

How does an Annuity work?

After you have taken your retirement tax free lump sum you may be able to choose between an Annuity and/or an Approved Retirement Fund. An annuity is designed to provide you with a regular and guaranteed income for the rest of your life. It is important to choose an annuity that reflects your needs and those of your spouse in retirement, so seeking financial advice before you make a decision is important.

Why chose an Annuity?

Annuities may be more suited to people who wish to avoid potential risks and would prefer a guaranteed income for their retirement. There are different advantages to taking out an Annuity and/or an Approved Retirement Fund (ARF). Our ‘Post Retirement Guide’ will help you understand the difference between these products. If you are unsure of the option that best suits you, call our Financial Planning Team on 074 9103938 and we will guide you through the process.

Types of Annuity

There are a number of choices you need to make when purchasing an annuity: A Single Life Annuity is payable for the rest of your life only. With a Joint Life Annuity, a percentage of your pension is payable to your spouse after you die. If you choose to include a Guaranteed Period, your pension will be payable for a minimum of the guaranteed period, even if you die during that time. A Level Annuity means payment of the Annuity remains the same throughout your life and an Escalating Annuity means payment of the Annuity increases at a fixed rate each year.

Help is at hand

No one starts out knowing exactly what they’ll need for their retirement years or what taxes and charges they will incur. With so many different plans and options available we all need some help making the decision that’s right for us. Thankfully, you’re not alone. From pension calculators to financial advisors, there’s plenty of help available. Use this ARF or Annuity tool from Zurich to see which option might be more suitable for you at retirement. There’s no right or wrong answer as to which option is better – just which one is better for you (based on the information you provide).

Tools to help you choose

Use the ARF or Annuity tool to see which option might be more suitable for you at retirement. There’s no right or wrong answer as to which option is better – just which one is better for you.
Use this Retirement Drawdown Calculator to look at the different options available in retirement. It compares the benefits of investing in an Approved Retirement Fund (ARF) with those of an Annuity.

Advantages of Annuities

  • You get a secure, regular income for life, so you know exactly where you stand.
    You can choose an annuity type that best suits your needs, such as one that gives a part-pension to your dependants after you die
  • Once you invest in an annuity, you will not need any more investment advice in relation to it
  • You don’t need to worry about investment risk as your income is guaranteed
  • You pay lower charges than with an Approved Retirement Fund (ARF)

Disadvantages of Annuities

  • Once you take the pension, your income level is fixed or indexed* to an agreed amount per year and can’t be changed afterwards
  • If you choose a level pension, or one that does not increase each year, inflation** will reduce its value during your retirement
  • The annuity rate is fixed the day that you buy the annuity, so you won’t benefit from any later increase in annuity rates
  • If you die early and your annuity income is just for your own lifetime, the money you used to buy the annuity does not go to your dependants – basically, your annuity dies with you
*Indexed or indexation, increases the benefit on your life insurance or investment policy automatically every year to make allowances for inflation. Your premium also increases each year to pay for indexation.
**Inflation, The risk that your money will lose value over time. Your buying power goes down as prices increase. You need to earn more than the inflation rate to get a real return on your money.

Free Guide to Annuities

Click on the link below to download free guide to Annuities

Remember you or the trustees of your employer pension scheme, can shop around for an annuity and you might be able to get a better annuity rate.
Always seek independent advice before making any decisions of this nature.

Warning: Past performance is not a reliable guide to future performance.
Warning: Benefits may be affected by changes in currency exchange rates.
Warning: The value of your investment may go down as well as up.
Warning: If you invest in these products you may lose some or all of the money you invest.

If you have questions or need advice

Why not give us a call and we will be happy to assess your existing arrangements and or discuss your retirement goals.


Call us today in Letterkenny: 074 910 3938

The information contained in this article is based on Advice First Financials’ understanding of current Revenue practice as at January 2020 and may change in the future.
Advice First Financial Services Ltd trading as Advice First Financial is regulated by the Central Bank of Ireland. Registered in Ireland.

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