An annuity is defined as “a fixed sum of money paid to someone each year, typically for the rest of their life”. Exactly what you would want in retirement, a guaranteed income for life.
The problem is that the amount of pension savings you need for the annuity income you want has changed dramatically.
We asked how big your pension pot would need to be to extract an income of €200 per week (€10,400 per annum).
If we asked this question in 2008, the answer would have been €150,000. Today, in order to achieve the same income, a pension pot of €300,000 is required.
That is a huge increase and is caused by two factors. Annuity rates depend on long term yields on bonds, which are linked to interest rates. Interest rates are at all-time lows, and therefore, annuity rates are at all-time lows. The other factor is that we are living longer.
Your pension pot’s size is determined by two things, how much you invest and the growth you receive.
In 2008 you could assume growth rates of 6% per annum for pension funds. If you were saving over 20 years, with a 6% per annum growth rate and a target of €150,000, you would need to contribute €324 per month.
Today, the Society of Actuaries has reduced growth rate assumptions to 4.5% per annum. Saving over 20 years, but now needing a pension pot of €300,000, you would need to contribute €772 per month.
To get your pension fund to the level you require, you will need to save more.
There is the option to hold your pension money in an Approved Retirement Fund (ARF) rather than buying an annuity. Many retirees have taken this option in the last few years. But this comes with investment risks and withdrawal timing risk. All of which could lead to a reduced income in the future or, worse still, a bomb-out, where the ARF runs out of funds.