IF YOU work for a company where a defined contribution pension scheme is in place, for where you are relying on Additional Voluntary Contributions (AVCs) to boost your defined benefit fund, you need to give considerable care to the purchase of your pension annuity. The annuity is the contract you buy from an insurance company with your pension fund from it will come the weekly or monthly pension cheque.
The size of your final pension, says Paul Kenny of Irish Pensions Trust, depends on two key components - the investment return achieved on your contributions and the annuity rate at which the pension is bought. Since there is very little you can do about the size of your pension fund once you retire - it has either performed well or not everything now hinges on the annuity rate available, and it is important to get the best rate available on the market. All policies now give an open market option, which means that the policy proceeds can be transferred directly to another insurance company, from which the annuity can be purchased."
This means shopping around, something the ordinary retiree is unlikely to be able to do themselves with any great effectiveness. Instead, the hiring of an independent broker, who can find out the best rates on the day for your particular circumstances is a good investment. Commission is usually one and a half per cent of the fund, but you can also negotiate a fee, particularly if the best rate is offered by a non commission based company like Equitable Life.
On the commission versus fee argument, IPT produces a weekly survey of annuity rates, including six offices which pay standard commission and one non commission office. The accompanying table illustrates the yield from an annuity purchased for £50,000. These prices relate to the week commencing June 25th, the non commission offices did not pay a higher annunity in all cases.
The value of the annuity depends on a number of circumstances. First of all, the retiree has most likely reduced the size of the pension fund, and the annuity they can buy, by taking out the 25 per cent allowable by the Revenue in tube form of a tax free lump sum.
The day on which you buy your annuity can also be critical, since the mainly international bond markets into which the insurance company that buys your annuity will invest the fund, can fluctuate. Finally, different insurance companies offer higher or lower rates depending on your personal circumstances, the main one being your age, sex and to a lesser extent in this country, the state of your health.
The older you are, the higher the annuity, because the shorter the period you are expected to live. Since men die sooner than women, men nearly always get a higher value annuity than women of the same age.
In Britain, the issue of health has become increasingly important in determining the size of the annuity. Here if you have cancer or a severe heart condition you will most likely get a better annuity rate, but in Britain someone who is a heavy smoker or overweight, has chronic bronchitis, diabetes, high blood pressure or cholesterol levels can also expect a 5-10 per cent better annuity rate. The trend of rewarding retirees in poor health has contributed to the arrival of specialist annuity brokers in Britain like Annuity Direct and the Annuity Bureau company which trawl the system for special deals.
Finally, the actual size of pension you can expect from the purchase of your annuity also depends on a number of factors, such as whether you make provision for a spouse's or dependent's pension after you die. The indexing of your pension in line with inflation will also have an effect on your total annual income.
