What is an annuity?

An annuity is a financial product that you buy from an insurance firm with a lump sum, usually from your pension pot. In return, you receive a regular income for life or a fixed period.

On this page, we’ll look at what annuity means and how they work, the various types available, and alternative options.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

An annuity, sometimes known as a pension annuity, is a financial product purchased using your pension fund.

In Ireland, you can purchase an annuity from an insurance company. Once you’ve agreed on the terms and entered into a contract, you give the company a lump sum and, in return, they will pay you a fixed income on a regular basis for the rest of your life. 

The amount you receive depends on your age, health, the size of your pension fund, and the annuity rate offered by the insurance company at the time you buy it. Once you’ve agreed to the terms, your payments are guaranteed.

Annuitants (those who’ve purchased an annuity) can choose to receive payments immediately or defer them to a later date.

Pension annuities come with different features that determine how much you’ll be paid, whether those payments can increase over time, and what happens when you pass away.

With a single-life annuity, you receive payments for the duration of your life only. Once you pass away, the payments will stop.

A joint-life annuity ensures that some of the annuity income (for example, 50%) continues to be paid to your spouse or partner after your death.

With a level annuity, the payment remains consistent each month or year. This type of annuity means you have stability with a predictable income.

An escalating annuity, on the other hand, provides payments that increase each year. The increase can either be at a fixed rate or in line with inflation (such as the Consumer Price Index). This can help your income keep pace with inflation.

Annuitants can choose to have the income paid out shortly after they retire, known as an immediate annuity. Alternatively, they can choose a deferred annuity, with payments starting at a later date.  This may be an option for those who are planning for retirement but don’t need income straight away.

If you pass away during the guaranteed minimum period (which can be anything up to 10 years*), your annuity income will continue to be paid out to your next of kin or your estate for the remainder of the specified period.

*https://www.revenue.ie/en/tax-professionals/tdm/pensions/chapter-06.pdf

Some insurance companies may offer slightly higher income compared to standard annuities for smokers or those with medical conditions. Because these factors can affect life expectancy, providers may offer enhanced, or higher, payments.

Pension annuity features typically can’t be changed once the annuity starts.

In Ireland, you have to meet certain eligibility criteria in order to purchase an annuity, but generally speaking, anyone with a pension fund can purchase one.

You can use funds from various types of pension plans, including:

• Personal retirement savings account (PRSA)

• Occupational pension, including any additional voluntary contributions (AVCs)

• Personal pension

• Approved Retirement Fund (ARF)

Typically, you need to be at least 55 years old and have built up enough money in your pension pot to purchase an annuity that provides you with a regular income in retirement.

An annuity provider will consider factors such as your age, health, and the size of your pension fund to calculate the income you’ll receive.

If you’ve reached retirement age and you have a pension pot of €100,000, you’re typically entitled to take a tax-free lump sum of up to 25%, which in this case amounts to €25,000. If you choose to take this lump sum, you’re left with €75,000 to purchase a pension annuity.

Let’s say you opt for an annuity with a rate of 5.3% and no additional features. Based on this €75,000, the annuity will provide you with a yearly income of €3,975 for the rest of your life.

However, it’s worth noting that the actual amount a pension annuity will pay can vary based on your age, health, gender, and prevailing interest rates. Annuity rates in Ireland vary from company to company, so it can be worth comparing providers.

Here are some points to consider when learning about pension annuities:

Pros:

• Guaranteed income for the rest of your life, regardless of market fluctuations

• No need to manage any investments

• The option of income continuing to be paid out to a spouse after death

Considerations:

• Pension annuity rates in Ireland depend on interest rates (among other factors)

• Terms typically cannot be changed after purchase

• Providers may set maximum age limits

• Fixed payments may not keep pace with inflation

Given that a retirement annuity is a long-term commitment, you might find it helpful to weigh your options carefully. A financial adviser who specialises in pensions can provide personalised advice based on your specific circumstances, preferences, and retirement goals.

In Ireland, pension annuities are sometimes used after taking a tax-free lump sum from your pension. Individuals can also take their pension fund in cash (subject to income tax). It can help to assess these choices while keeping Revenue regulations and potential tax implications in mind.

While your pension might be your main source of income in retirement, diversifying your sources of income can enhance your financial security. Spreading your savings between fixed term and demand deposits can help balance access, stability, and returns. Demand deposits keep your money readily available for short-term needs, while fixed term deposits typically offer higher, guaranteed interest rates for locked-in funds. This mix allows you to benefit from both flexibility and predictable earnings, while spreading deposits across institutions can also enhance protection under national deposit guarantee schemes.