Guaranteed Income for Life
Guaranteed Income in Retirement Introduction At Everlake, we believe that a guaranteed income for life is the key to a worry-free retirement for many people. With increasing life expectancies many people are concerned about outliving their savings in retirement. The task of managing the underlying investment of your retirement funds can cause unnecessary work and anxiety due to market volatility, investment risk and uncertain economic times. Aligning your financial resources with the remainder of your lifetime, however long that might be, is the foundation of an anxiety-free retirement. We can guide you to secure your future with trusted, reliable, and proven financial tools to ensure your retirement years are filled with certainty and peace of mind.
Lifetime Income Guarantee With increasing life expectancies, providing a lifetime income guarantee, no matter how long you live is a key consideration for many people. The two biggest risks in retirement are running out of money or dying with too much money – two sides of the same coin. The challenge with both risks is that they are dependent on how long you will live, and of course that is the great unknown. Both of these risks can be managed by replacing the uncertainty of how long your money will last with the certainty of a guaranteed income for life. You can align your financial resources with your remaining lifetime, however long that might be. This way, you’ll never run out of money.
What is a Guaranteed Income for Life? The product that we recommend is known as an annuity, which is an irrevocable single premium contract which provides you with a regular income for life during your retirement. The amount of income received depends on the options that are chosen at the time of purchasing the annuity and the size of the pension fund. The interest rate you will receive is fixed for life at the time you decide to purchase this product and is higher for older ages and when interest rates in general are higher. Whether you want a fixed income, inflation-protection, or the flexibility to add additional guarantees for your loved ones, there are options available for you. You can tailor your income to fit your unique needs, with clarity and certainty of income for the rest of your days.
Your regular income is paid monthly either in advance or in arrears into your bank account. The income is paid in the same way as a salary with tax deducted at source and a PAYE tax credit. Income is taxed at your marginal rate of tax and for many people in retirement this can be extremely low with many people paying an average rate of tax of less than 10%. A guaranteed income shields you from the ups and downs of the stock market, providing a stable foundation for your retirement.
Options Tailored for You The type of annuity to be purchased may be set out in the rules of your pension scheme, however in certain cases you may be able to select the type of annuity you can purchase. You are also able to “shop around” and purchase your annuity from any provider in the market. An annuity may therefore contain some or all of the following options. Escalation - you can choose to have your income payments change on each anniversary, at a fixed level, in line with inflation (to a certain maximum), or they can remain level. Depending on the payment options you choose, you could find that the effects of inflation over time leave you less well off than you’d expected. In our experience, the initial pension payable is considerably lower and generally takes around 20 years to “payback” via the increases. If you retire at 65 this means you will be well into your 80s before you see any benefit from the pension increases. Given that most people slow down their lifestyle as they get older, we would generally advise against looking to pay for an increasing pension. Guaranteed Period - you can have a guaranteed period (up to a maximum of ten years) starting when you retire, during which your annuity income is paid out, even if you die during this period. In our experience few people are aware of the option to guarantee their pension for a minimum term of 10 years and the difference in cost between a 5 year and 10-year guarantee is negligible. Furthermore, it is possible to purchase a 10-year guarantee at outset up to age 81 next birthday. With interest rates of up to 8% currently available this means that up to 80% of the pension fund’s value would be guaranteed. Dependant’s Pension - you have the option to buy a dependent’s pension which ensures a specified proportion of your annuity continues to be paid to your spouse/civil partner after your death in retirement. In our experience many people have savings and investments in their own name and often there isn’t the need to purchase a spouse’s pension. However, where a need does exist, up to 100% of the original pension can be guaranteed for the life of the surviving spouse. Children’s Pension - you have the option to buy a children’s pension which pays an income to your children if you (or both you and your spouse) die, subject to policy conditions.
Overlap - this is available to you if you have chosen both a guaranteed period and a dependant’s pension. ’With overlap’ means that if you die within the guaranteed period, your dependant’s pension becomes payable immediately and your full annuity continues to be paid until the end of the guaranteed period. ‘Without overlap’ means that the dependant’s pension does not become payable until the end of the guaranteed period, as your own full pension continues to be paid until the end of the guaranteed period. Health - another factor which could determine the amount of income received is your state of health when you buy the annuity. Certain health conditions may mean we can offer you an enhanced annuity. In summary, you can tailor and customise your income to fit your unique needs. Whether you want a fixed income, inflation-protection, or the flexibility to add additional guarantees for your loved ones.
Further Advantages Tax Efficiency - choosing a guaranteed income for life is often a very tax efficient strategy. Many people in retirement pay relatively modest rates of income tax, and the additional guaranteed lifetime income is often only taxed at around 10 to 20%. Cost Reduction - a guaranteed income for life is very cost effective. Once set up, the level of future income payments is clearly outlined. There is no requirement to pay for further advice in relation to your retirement income or management of investments. No Investment Risk - as people age, their financial goals and risk tolerance often change. They may not be as well-equipped to adjust their investment strategies to align with these changes, potentially leading to suboptimal asset allocation. As people’s investment horizons shorten, they also become more vulnerable to short term market fluctuations and economic uncertainty.
Legacy & Estate Planning We often speak to people who are approaching retirement and are overly focused on leaving a lasting legacy after their death. However, we believe that the primary purpose of a pension is to provide financial security in your own retirement however long you live, as opposed to worrying about your legacy. Unless you are relatively well off, most people need the income from their pension either to make ends meet or to live a full life. Of course, that is not to ignore your desire to leave a legacy. Any excess income can often be given away to family completely free of tax by using the annual small gift exemption. You can also tailor your guaranteed income with additional benefits to ensure that your loved ones are financially protected. Where appropriate, it is also possible to convert part of your pension into a Guaranteed Income for Life and leave part invested in capital markets via an Approved Retirement Fund (ARF).
Encashment You cannot encash, redeem, sell, or assign your annuity either in part or full. It provides a regular income while you are alive. The policy does not provide a lump sum on death. In the absence of a guaranteed period, a dependant’s pension or a children’s pension, your annuity income will cease when you die.
Tax and Legal Issues Your annuity income is subject to income tax and any other applicable taxes, duties, and levies which are deducted at source. The policy and the benefits payable under it are based on current legislation, including current taxation legislation. Information on current taxation legislation can be found at www.revenue.ie. If there are any changes in taxation or other legislation affecting the policy we will make such alterations to the terms of the policy as, in the Actuary’s opinion, are necessary to take account of such changes.
Important Note All features are subject to the policy conditions. Once the annuity options are chosen, they are irrevocable and cannot be altered. Always seek competent financial advice before making any decisions about your finances. While great care has been taken in its preparation, this document is for information and educational purposes. It is of a general nature and should not be relied on in relation to a specific issue without taking financial, insurance or other professional advice.
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