After last week's survey on annuities, we received a note from Mr M from Limerick clipped to an article which appeared recently in The Sunday Times. It was about a unique pension annuity option for the selfemployed, or those employees not contributing to an occupational pension plan, called "staggered vested" annuities.
"These `staggered vested' annuities are not available here in the Republic of Ireland. I'd like to know why I have to buy an annuity with my pension fund."
Mr M is absolutely correct about the compulsory nature of annuities here. When someone with a personal pension plan retires typically between age 6070, they are required to convert the value of their pension fund (minus the 25 per cent which can be paid out as a tax-free lump sum) into an annuity, from which your life-long annual pension income will be paid. But this may not suit someone who is only winding down from their job or business or who finds they do not need the entire income that will be paid from their pension. Unless you have more than one pension fund with a life company, you don't have much choice when you do retire (or partly retire) but to cash them in and take the income. With more than one fund, you can allow one policy to mature, say at age 60, the next at age 64 and the third at age 66 and phase the last vestiges of work out, and the pension incomes in. The advantage of this is that the older you are, the better annuity rate you will be paid.
In Britain, the Inland Revenue now permits a more sophisticated version of this type of pension phasing. The new product is called a "staggered vested" annuity in which the policy fund is not all used to buy a single annuity, but is segmented into say, 100 or more parts, and a number of these segments are cashed in to provide that particular year's income, leaving the balance to benefit from future investment growth.
Another big difference and one that may not suit everybody between staggered vested annuities and conventional ones is that the 25 per cent tax-free, lump sum portion of the pension fund is used to help provide that slice of annual income each year. There can be no question of using it to buy a new car or take a big holiday.
Staggered annuities like these need careful investment management and you need to have absolute confidence in the ability of the life company's fund managers to deliver your target income each year from the remaining value of your pension fund. The system does get around the biggest downside of compulsory purchase annuities however getting stuck in a fixed interest rate for life. This staggered vested annuity is not approved by the Revenue Commissioners here, but this could change as part of the overhaul of the whole national pension system inspired by the setting up of the National Pensions Initiative by the Department of Social Welfare and The Pensions Board.
They consulted widely with interested pension groups over the last 18 months and will produce their report by the end of this year. The issue of compulsory annuity purchase is expected to be addressed. Of the existing pension companies in the Republic, the Equitable Life is the best known provider of staggered vested annuity providers and has had one of the longest standing schemes in Britain. But we understand the Norwich Union is also preparing itself to introduce them for its personal pension holders.
