The provision of financial security in retirement is vital for society and individuals. However basic knowledge on options for retirees is still lacking in the majority of the population. Pension systems around the world are coming under increasing pressure with rising life expectancies, uncertain economic conditions and increased sovereign debt. Therefore it has never been more important for citizens of Ireland to be aware of their options and ensure the most suitable option is selected on retirement.
Addressing the topic ‘Annuity Purchase, rather than ARFs, should be the default option for retirees’ the main pros and cons for each option are illustrated. We give a brief overview of the pension system in Ireland and look at some pension systems across the globe, in particular focusing on elements that relate to the topic at hand. Retirees are becoming more responsible for managing their own financial planning needs; therefore we discuss behavioural impacts of decision making assessing whether retirees are ‘rational’. We look at annuities focusing on rate trends, the time horizons for purchase and the mortality premium. Following this we examine the ARF as an option assessing the risk of bombing out and given the current economic climate, we briefly backtest ARF performances since 2008.
It is our opinion that retirees should maintain the choice. Ultimately an individual’s decision is dependent on their own personal circumstances and whether they have a sizeable enough pension pot to afford them the choice. Assuming the retiree has a sufficient pension pot we believe the most appropriate default option would be an ARF with the ability to purchase an annuity at a later date. According to Moneywise Financial Planning retirees today purchasing an Annuity ‘find one’s self in the wrong place at the wrong time’. We agree with this statement given the lack of control over retirees normal retirement age and fluctuating annuity rates. As with any investment, the timing of purchase can have a major effect on the rate of return.