Annuities are principally designed as a reliable means of guaranteeing a steady cash flow for an individual during retirement years. This in turn reduces the anxiety of longevity risk of outliving one’s assets.
An annuity is a fixed sum of money paid to someone each year, typically for the rest of their life. Payment for annuity commences in the case of Nigeria, at the normal retirement age or at 50 in the case of early retirement. An annuity can be obtained from Life Insurance companies.
The payment can be made on a monthly or quarterly basis depending on the retiree’s preference. A provision in Section 7 of the Pension Reform Act 2014 explains it better. It also makes the distinction between programmed withdrawals which is provided Pension Fund Administrators (PFA). A Programmed Withdrawal is structured periodic withdrawal based on the peculiarities of the retiree. The Retirement Savings Account balance is spread over the expected life span of the retiree while the funds remain in the account and managed by the PFA.
According to the pension provision:
“A holder of a retirement savings account shall, upon retirement or attaining the age of 50 years, whichever is later, utilize the amount credited to his retirement savings account for the following benefits… (b) programmed monthly or quarterly withdrawals calculated on the basis of an expected lifespan; (c) annuity for life purchased from a life insurance company licenses by the National Insurance Commission with monthly or quarterly payments in line with the guidelines jointly issued by the Commission and National Insurance Commission.”
An annuity is primarily an insurance contract in which you consent to pay an insurance firm a specific amount of money usually in a lump sum or a series of payments and the company will in turn invest your money and promises to pay you a regular income right away or in the future.
In Nigeria, the annuity agreement can only obtained from an insurance company licensed by Nigeria Insurance Commission (NAICOM). The person buying the annuity known as the annuitant is required to instruct his PFA to transfer the premium to the insurance company after lump sum has been paid. The annuitant is guaranteed monthly or quarterly payments (depending on agreement) for a period of ten years. Payment will continue if the annuitant is still alive.
In the case that the annuitant dies for the guaranteed ten years, the named beneficiaries will only be paid for the remaining period of the guaranteed years.
There are many reasons why an annuity is seen as a key retirement savings vehicle. The first is the continuous flow of income for a retiree for life. Thus, in view of rising life expectancies, the risk of outliving one’s retirement savings does not arise.
There is also protection from the risk associated with the investment of lump sum. Annuitant also benefit from structured management of resources and the transference of the risk of diminution in assets and possible failure of investments of retirees to insurance companies which are better equipped to manage risks.
However, experts are constantly comparing the benefits of an annuity and the disadvantages. There is a perspective that the investment returns on retiree funds belongs to the retirees in a Programmed Withdrawal whereas the returns on annuity fund belongs to the insurance companies. A second angle is that an annuitant can only move to another insurance company after two years if dissatisfied with the current insurance firm. Finally, annuity on the most part is for the benefit of the retiree and not for the beneficiaries or the next of kin.
It is important to note that annuity is a viable option if you are not sure of possessing the skills to manage your retirement portfolio and want to be guaranteed an income during your lifetime.
FRANK ELEANYA
