Friday, September 18, 2009

Pension Plans with Guaranteed Annuity Rates

Even though it is not now possible to buy a pension plan with a guaranteed annuity rate attaching to it, there are people that may have old policies with this feature.

If you have one of these policies, the provider may allow you to invest additional contributions in it to avail of the underlying guarantee on the original contract. But, because the policies are probably 20+ years old, the charging structures on them will be higher than what are currently available on the market. It is, however, possible to negotiate on the commission basis and you should do this to ensure more favourable terms for yourself.

It is often the case that a policyholder may have a number of different Personal Pensions (RACs) with various providers. When it comes to retirement, the policyholder is entitled to take 25% of their fund/s tax-free. Usually, the 25% is taken from each individual policy and the balance is used to buy an annuity, invest in an Approved Retirement Fund/s or a combination of both.

If you are fortunate enough to have one of your pensions maturing with a guaranteed annuity rate attaching to it, the annuity rate will be a couple of percentage points higher than what is currently available on the open market.

So, if you have i) a number of different policies ii) a guaranteed annuity rate applies to one of them iii) you want to avail of the guaranteed rate to buy an annuity and iv) you want to take your tax-free cash of 25%. What should you do?

Instead of taking the 25% from the policy that has the guaranteed annuity rate, you should take the equivalent amount from one of the other pension plans. It is not compulsory that the tax-free cash is taken from each individual policy, provided you can show that this amount does not exceed 25% of the total aggregate funds that are available.

If you were forced to take 25% of the policy that had a guaranteed annuity rate on it, this would put you in a disadvantageous position with regard to the benefits accruing, so Revenue will allow the aggregation of total funds available to overcome this predicament. It is essential that the 25% tax-free cash does not exceed the Revenue limits.

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