Retirement Annuity
Retirement seems to be far away when the individual
is in the process of making a stable career and life. The retirement planner
can assess the individuals present investments, circumstances and needs for
retirement and can devise a suitable strategy or decides the correct retirement annuity plan. A financial plan which is holistic
and addresses all the investor s concerns can only be an ideal solution. This
step can guarantee that the retirement is exactly as it was expected to be
. Retirement annuities (RA) are always the topic of debate as the needs and
circumstances of individuals are different.
To know if or not a retirement annuity is suitable, the individual should study the financial planning process with the help of the financial planner who is a certified professional. If there is a need to terminate the policy earlier than planned it may result in payment of early termination penalties but allow the money to be invested in other ways. The financial planner is competent to give advice in circumstances like this .
About Retirement annuities An RA is a Retirement fund . Retirement annuity cannot be bought. The individual can make an application for membership of an RA Fund . It has a legal status with its own rules and regulations . However, the different funds may have different set of rules as per law and also framed by the trustees of the fund. The members make regular contributions to the fund which is managed by the trustees . These funds are not like company sponsored retirement funds and therefore individuals can make investments in the fund without the involvement of the employer. The assets managed by the fund are owned by the fund and not by the member . The member can claim the benefits from the fund only under circumstances like retirement, death or disability . The funds are sponsored by the Insurance companies. The terms are mentioned in the contract when an investment is made in the fund . This contract mentions the penalty that would be levied if the contributions to the fund are not made during the time of the contract. The policy made out in the name of the member is made between the life insurance company and the fund and a copy of this policy is issued to the member . The contract prohibits the member from moving the funds invested in it to any other fund . The fund transfers the amounts collected from the members to a life insurance company which invests them in a wide variety of assets like equities, gilts, properties and cash as stipulated in the contract. The earnings from these investments are used to pay back the member at the appropriate time. The unique feature of the RA fund is that there is no requirement for a policy or an assuror. The funds offer the facility to invest in unit trust linked instruments from asset management companies .
Special features of retirement annuities
The member can access the investment at the earliest by the age 55, with the
exception of permanent disability. They must withdraw the funds at the maximum
age of 69 . The assets are owned by the funds and when there is an assurer,
the assurer owns the assets. The retirement annuities are protected from creditors
and they cannot be attached in the case of the investor becoming bankrupt.
Tax benefits of retirement annuities
The amount of money which is used to make contributions towards the RA fund is eligible for income tax
deduction up to a certain limit. They are usually 15 per cent of the net income which excludes contributions to a pension fund. The net income from the interest or rental income from the portfolio in which the money is invested is liable for tax at the rate of 18 per cent . The member cannot withdraw the whole of his or her investment in cash . According to the law at two thirds of the proceeds of the investment should be used to compulsorily buy an annuity. A part of the money that is withdrawn in cash is exempt from tax and the remaining amount attracts tax at the average tax rate of the two years preceding retirement of the member.
Commission and fees of retirement annuities
The regulations and law stipulate that a maximum of 3 per cent of the total contribution can be paid as commission on a single premium RA. If the premiums are paid as recurring contributions, the commission is calculated according to the number of years of the retirement annuity and is generally paid within the first few years of the contributions. The fee is usually on an hourly rate or a percentage of the amount invested or the percentage of the value of the investors assets under their management. The member should be informed about how much from his contributions are invested after deducting the fees and commission. This fee excludes the fee that is paid to the financial advisor under whose advice this investment is made. The fees for asset management and fund management are charged extra and are payable initially or spread over a specified period. The investor should therefore know how much amount he is paying towards commissions, fees and the various charges to various agencies when he makes an investment in an RA. This would help him to plan and distribute the expenses according to his ability and convenience . They should be discussed clearly before deciding to make an investment to avoid surprises .
Financial planning for retirement
An investor should decide about his lifestyle in the post retirement as well
as pre-retirement period. He should also find out how much money would be
required to maintain that lifestyle and for how long . He should also select
the kind of assets that can fetch the kind of returns he wants and their risk
level. Ultimately the risk level would decide the returns and the other factors
like lifestyle etc. Retirement annuity are great retirement savings depending on
the investor s needs, circumstances and financial goals . With the financial
planners guidance the investor can select a suitable retirement vehicle from
among those available in the market.
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