Retirement savers are forced to choose a risky product to provide their income in retirement to maximize what they get when they stop working.
Survey shows people are no longer using annuities to fund their retirement, instead opting for a complicated product called an approved retirement fund.
Annuities were the preferred retirement savings structure for decades, but have fallen out of favor with retirement savers.
Only 1 percent of those with a choice are now choosing pensions, according to a survey of more than 100 pension advisors nationwide conducted by Pension Trustees Independent Trustee Company (ITC).
It found that seven out of 10 advisors say the fact that the annuity can die with its owner is the main deterrent for pension savers to choose an annuity.
An annuity is a simple annuity payment option that guarantees to pay a certain amount each month during a person’s retirement.
But they have become enormously expensive in recent years because interest rates have been so low.
According to the ITC, pension rates have fallen significantly in recent years.
This means that a person with assets of €500,000 or more will struggle to earn much more than €15,000 in income each year.
While this is guaranteed, it would take 33 years for the person to get their money back.
A few years ago, a similar fund would have generated an old-age income of between 22,000 and 30,000 euros from a pension.
ITC said those with a choice are now overwhelmingly choosing Authorized Retirement Funds (ARFs).
These are personal retirement funds that allow the owner to keep the money invested after retirement.
ARF holders can opt out periodically to earn income subject to income tax, PRSI (up to age 66), and USC.
Any assets remaining in the fund after death are distributed to the person’s estate.
However, because the fund is invested in stocks and bonds, its value can go down as well as up, making an ARF riskier than an annuity.
Glenn Gaughran of the Independent Trustee Company (ITC) said: “Our survey shows that 98 per cent of pension savers with a choice would prefer an ARF to an annuity when they reach retirement.
“Consultants report that only 1 person takes the pension path – and only as part of a pension-VVG combination.”
He said the annuity forfeiture has been happening for some time. “They’ve become an extremely expensive option – although most advisers say it’s their inflexibility rather than cost that puts people off,” Mr Gaughran said.
He added that pensions, which are the mainstay of public sector schemes, have become extremely expensive and as a result many employer-funded private sector schemes are effectively buying members out of their pension with attractive offers if they choose an ARF. He said those with smaller employer-funded schemes, many with their own businesses, have had the choice between a pension and an ARF for years.
https://www.independent.ie/business/personal-finance/pension-savers-opt-for-risky-product-as-expensive-annuities-fall-out-of-favour-41810771.html Retirement savers opt for risky products as expensive pensions fall out of favour