Annuity plans for retirees

QUESTION: I recently retired after a long career with an international organisation based in the United States. I have a generous pension, but I would also like to learn about annuity plans offered by private-sector companies in Jamaica.

- Carl

PFA: An annuity is a contract whereby one party, the annuitant, agrees to pay a stipulated premium deposit and the other, the issuer, agrees to pay to the annuitant regular payments, fixed or variable, at regular intervals, beginning on a specified date and guaranteed for a fixed period, or for life, or both.

The annuities offered in Jamaica are no different from those offered abroad, and are only offered by life insurance companies. The annuity options are similar: life only, period certain and amount certain joint and survivor, flexible, and instalment refund, but there is also a US dollar-indexed annuity paid in Jamaican dollars.

When selecting an annuity, determine if the payments are for yourself only or if dependents are also to benefit. Next, consider the amount of income required to meet expenses.

Jamaican residents should note that they may take a quarter of their pension benefit, at the time of retirement, as a tax-free lump sum, thus leaving the rest to purchase an annuity.

Annuity benefits may be received monthly or annually. An annuity generally provides for a lifetime guaranteed income, and it is a great method for ensuring that income is available at a time when it is needed most.

Life only or straight-life annuities make payments as long as the annuitant is alive. They make no residual payments to the annuitant's beneficiaries or estate after he or she dies and, for this reason, provide the highest amount of guaranteed income per dollar of premium paid. Their main advantage is that the annuitant cannot outlive his or her capital, and are suitable for persons who have no dependents, or whose dependents are fully provided for otherwise. They are very advantageous to persons who live to a ripe old age.

A period certain or fixed term annuity guarantees a specified payment amount for a set period, five or 10 years, for example. If the annuitant dies before the end of the guaranteed period, the named beneficiary receives payments up to the end of the term. There is also a combination of the life annuity and the period-certain annuity, which may read as follows, "five years certain and life thereafter". In this case, the annuitant receives a payment for life if he or she lives longer than five years but, should he or she die before five years, the beneficiary receives the benefit for the period between the time of death and the end of the five-year term.

Another type is the joint-and-last-survivor annuity whereby the surviving spouse continues to receive payouts for the rest of his or her life after the annuitant dies. Depending on the type of arrangement, the survivor may receive the full benefit or a part thereof, 50 per cent, for example.

The Jamaican version of the flexible annuity provides for annuity payments at a set amount which increases at a set percentage each year between ages 60 and 70, and then levels off at a fixed amount until death.

The instalment-refund annuity provides that, upon the death of the annuitant, the balance of the capital sum used to purchase the annuity is refunded to the named beneficiary.

Immediate annuities are bought with a single lump-sum payment and annuity income starts one month later if it is to be paid monthly, or a year later if payments are to be made annually.

On the other hand, there are deferred annuities for which premiums are paid over time until a certain date, the maturity date, at which point payments cease and benefits begin.

The following factors are taken into consideration when determining the amount of income to be guaranteed by the annuity issuer: the type of life annuity, the annuitant's state of health, funds available to purchase the annuity, the age of the life on which the guarantee is based, and the interest rate assumed in calculating the annuity.

Here are some advantages of annuities: payments can be guaranteed for life, no management decisions are required once the annuity has been bought, the income is safe from persons who would take advantage of elderly persons, and fluctuations in market rates do not generally affect benefits.

But payments cannot be altered to reflect changing needs, and inflation protection is not automatically built in, although it can be purchased.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com.