All About Annuities - Part 2

As promised, here is Part 2 of my article on Annuities, answering questions 6 - 10 on my post from Tuesday.

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My hope is that along with Part 1, this article will provide a comprehensive overview of this common and essential financial product. Giving the reader all the necessary information to adequately assess the various annuity offerings available locally.

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So, without further ado let's dive right in…

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6. How will this annuity impact my overall financial plan and retirement goals?

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This depends on your financial and retirement goals, which is specific to each individual and their desires, preferences and what they deem the most important in life and their finances.

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But investing in your own personal annuity is always a good place to start for retirement as it gives you the flexibility of being able to increase contributions over time as you progress in your career and your income increases.

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It also allows you to take charge of your own retirement planning and not rely solely on what your employer provides for retirement (if any).

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If your desire is to establish a solid financial plan and chart out some retirement milestones then having a good estimate of what your financial needs would be in retirement would be a good start. Speaking to a financial advisor would provide this necessary information and guide your overall financial and retirement goals.

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7. Are there any optional riders, such as long-term care or guaranteed income riders, and are they necessary in my case?

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There's no optional rider that can be added in Trinidad to my knowledge that adds long term care.

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There is however, a Total Disability waiver of premium rider that provides for your premium to be waived in the event that you were to become disabled and unable to work. As it relates to guaranteed income... this is built into the annuity as the monthly pension income is paid for the rest of your life once the annuity matures at retirement age/maturity.

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8. What are the potential tax implications, both during accumulation and when I start withdrawals?

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During the accumulation stage you will be entitled to tax relief up to $5,000/month or $60k per year. All of your contributions up to that allowance will be eligible for tax relief at the individual income tax rate of 25%. So, in the event you're maxing out your annuity contributions to the full $60k per year then you will be entitled to a tax refund of $15k each year.

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After the Annuity matures and you start to receive your monthly pension income from the fund, your pension income will be taxable if and only if it exceeds the country's Personal Allowance of $7,500 per month. This is your tax-free income level. Every dollar earned above this amount will be subject to the income tax rate of 25%.

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This is why it is a good idea not to put all your 'retirement eggs' into an annuity alone, as you may end up paying a significant amount in taxes during your retirement years. A better strategy would be to also invest into a non-taxable source of retirement income such as an endowment life insurance policy which pays a tax free lumpsum at retirement age, or another cash value accumulating life insurance policy, an unregistered pension plan or an investment portfolio that offers the potential for higher returns.

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9. How does the annuity’s rate of return compare to other investments over my expected time horizon?

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Sagicor's Tax Secure Annuity offers a 2% return which is the current credited interest rate quoted on our annuities. Relative to other annuities and similar tax incentive retirement investments, this is a competitive rate of return as nowadays the rates range between 1.5% to 3.5% across the broad range of our competitors at other insurance companies and banks. This includes the tax incentive retirement accounts at the banks which aren't annuities but offer the same tax benefits, but with less protections to the client in the form of guarantees.

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As mentioned previously, the quoted interest rate is only part of the equation because more importantly, the FEES PAID (load) will determine your real rate of return on your annuity investment. And Sagicor is one of only two companies in Trinidad that I am aware of that offers a no-load annuity plan.

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As it relates to other investments such as equities and bonds, it is possible for the client to earn a higher return from an investment portfolio compared to an annuity, but two factors that should always be considered are the tax benefits available to the annuity holder and the guarantees provided by an annuity.

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Tax Benefits:

As mentioned in point (8) above, annuity contributions up to $60k per year will be eligible for tax relief meaning that $15k will be refunded to you when you file your Individual Income Tax Return. Therefore, the real cost to you is $45k but you still get the benefit of that full $60k investment into your fund. One way to perceive this is as an immediate 25% return. To my knowledge there is no other investment product that offers you this level of personal tax relief.

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Guarantees:

There are two major guarantees to the holder of an annuity. The first is the guarantee of income for life! No other investment product does what an annuity does, and that is provide a guaranteed income for the rest of your life. This income is not variable and does not depend on market or economic conditions, it is a fixed pre-determined predictable monthly sum that MUST be paid by the company every month for as long as you live. Even if you live for a very long time and your total pension income exceeds the amount that was originally in your fund. The Insurance company is legally bound to continue your pension payment as long as there is breath in your lungs.

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The second guarantee is elaborated on in point (10) below.?

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10. What happens if the company offering the annuity faces financial trouble? Are there any protections?

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The protections that exist are in the form of the government backing or guaranteed rate of return on the annuity. There is a CBTT (Central Bank of Trinidad & Tobago) guarantee of 1% return on ALL REGISTERED ANNUITIES offered in Trinidad and Tobago. This means that in the event of a financial failure or bankruptcy at one of the institutions your principal (the total of all your contributions) plus a minimum of 1% return is GUARANTEED to the investor.

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On that note however, I would be mistaken not to mention that another factor to consider when choosing which company to invest in with your annuity is the size, stability and financial strength of the company. Especially given this country's recent history with collapsing financial institutions.

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And Sagicor is currently the only indigenous Caribbean company to be listed on the Toronto stock exchange, this is a testament to the success, stability and strength of the company. It also means the company is subject to a greater level of corporate governance as the compliance requirements at the group level are above what is needed for local reporting and regulations. The financial health of the company is under a great level of scrutiny not just by regulators but by foreign shareholders.

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This brings me to the end of this edition. I hope this article serves you well and provides readers with sufficient information to make informed decisions when assessing and deciding on which annuity is best for them.

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If you have any questions, concerns, queries or if you desire to speak to gain clarity on any one of the points addressed in this article over the last two days, send me an email or DM on LinkedIn, contact me on WhatsApp or give me a call. My contact number is listed on my profile.

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Remember as always…

Finance is Personal, so start taking it Personally!