Financial Adviser | A life annuity for retirement income
QUESTION: My mother operates her own business. She contributes to the National Insurance Scheme, a Sagicor pension investment, life insurance, a critical-illness plan, saves at her credit union, and invests at a broker. Until recently, it didn't dawn on us that it would be a lump sum that she would get from Sagicor and not a routine pension payment. At 51 years of age, where could she invest to get a pension paid monthly or fortnightly instead of just a lump sum?
FINANCIAL ADVISER: If by "a Sagicor pension investment" you mean the approved retirement scheme - ARS - that Sagicor operates, you need not worry as she will be able to purchase a life annuity at the time of her retirement. An annuity is a financial product that makes a stream of payments over time to an individual.
An ARS is a pension arrangement designed for self-employed persons and employed persons who are not active members of an approved superannuation fund. It allows members to contribute up to 20 per cent of their pensionable salary towards a pension but does not exclude employers from contributing on behalf of their employees. It, however, limits the employer's contribution to the difference between what the employee contributes and the statutory maximum of 20 per cent of pensionable salary.
The benefit of a life annuity is that it fully protects the annuitant from longevity risk as it provides a stream of payment as long as the pensioner lives, but it is not possible to change an annuity once it has been established.
If the current regulations hold, your mother will have two options at retirement: take a tax-free lump sum equivalent to 25 per cent of the accumulated funds and purchase an annuity with the balance,or buy an annuity with all of the accumulated funds. I doubt you would be surprised to learn that the latter would yield a higher monthly payment to your mother.
A first step would be for your mother, as a member of the ARS, to make contact with Sagicor and request a copy of the handbook, which is much simpler to read and digest than the plan rules. It will give guidance on matters, including conditions for early retirement, options relating to late retirement, and the benefits available on retirement, including the form of pension - which ultimately, is determined by the purchaser.
Methods of pension payments
There are several methods of pension payments such as the right to take a tax-free lump sum of 25 per cent of the accumulated sum or opting for a full pension as I mentioned previously. Another option is joint life and last survivor, which provides for a pension to continue to be paid to the surviving spouse after the death of the annuitant up to the death of the survivor.
Some pensions are paid for a set minimum period - five years certain or ten years certain, for example - and life thereafter. This means that should the pensioner die within the first five years of the contract in the former case, a pension would be paid for the remainder of the five years to the pensioner's beneficiary. But if the pensioner lives beyond five years, a pension would be paid for the full lifetime of the pensioner.
The price of the annuity is influenced by the age and gender of the annuitant as well as the form of the annuity such as five years certain. It is also possible to purchase an increasing annuity whereby the payments are increased annually to provide a buffer against inflation. This feature would add to the price of the annuity and would mean that the starting pension would be smaller than a flat pension, which would not increase.
It would make sense to check with Sagicor if there are restrictions relating to buying an annuity from other providers, Guardian Life and NCB Insurance being the others. If there are no restrictions, she could, when that time comes, seek quotations from the other companies to determine how much pension the pool of money can purchase to guide her in making a decision.
If your mother is a member of an ARS, as it seems to me, when her retirement comes, she will be able to get a regular monthly stream of retirement income from the annuity she will purchase then.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial advice and counsel.