A common mistake with retirement decisions

Image that I'm 65 and deciding to retire, let's assume my wife is the same age as me and after taking lump sums from my pension I have 250,000 left over in my pension fund.

I meet with a financial adviser to go through my retirement options and I'm persuaded to go for the Approved Retirement Fund (ARF) option because I will be able to provide a fund for my wife in the event of my death and also the possibility of a lump sum for my children on her death.

The costs of the ARF are reasonable at 1.73% in an international context for a relatively high touch and complex retirement solution intended to run for the whole of the rest of my life.

This sounds better than the alternative of a fixed annuity that dies with us. But is it really?

The annuity that I can currently secure on the following basis:

Level (no inflation protection) 50% spouses pension and guaranteed for a minimum term of 10 years.

The annuity rate is currently 4.7% or 11,692pa for a 250,000 pension fund. That would reduce to 5,846pa on my death but would provide a guarantee of at least 116,920 (10 year's payments or 47% of the fund) in all circumstances.

Source Irish Life data accessed 10th March 2025

The graphic above illustrates how an ARF would most likely turn out if I try to match the guaranteed pension available from the annuity of 11,692pa from age 65 following a "balanced" risk 4 investment strategy.

I'm projecting a success rate of 27% at age 100. In other words, 73% of the time I should expect to run out of money by age 100 if I took the same income as the guaranteed annuity I can secure today.

Cost of spouses protection

Note that if the same client added a 100% Spouses Reversion instead of 50%, the annuity rate reduces from 4.9% with only a 5 year guarantee to 4.594% with 100% spouses pension and a 10 year guarantee. That's a cost of €765pa to provide a guaranteed income for two lives or a minimum return of 46% of the pension fund.

It is most likely that if we quoted in the open market we would recover some if not all of that additional cost.

What if I increase the risk to 100% equities?

This improves the probability of success to 54% on average at age 100 but introduces a wide range of possible outcomes including the possibility of "bombing out" and exhausting the fund in my mid 80s as well as the possibility of a significant inheritance for my children.

I might not live that long

But you might!

Many people underestimate how long they might live and therefore dismiss the real value of an annuity which is that it is a guaranteed income for life, however, long you live.

The retirement challenge

This illustrates the nature of the risks we all face when thinking about the choices we make in retirement. By definition, half of us will live longer than average but there is no best before date on your birth certificate, so you don't know for sure if it will be you or not.

The only way to guarantee you won't run out of money, however long you live, is to purchase an annuity and many people are put off by the idea that if they die early the pension fund is "lost".

We talk about these issues in this podcast

For educational and information purposes only. Not a recommendation to pursue a particular retirement option. Always take professional advice before making any investment decisions.