2025 is going to be the year you start seriously saving for retirement. But… how do you do that? It seems like there is so much information on financial products, and it’s all written in gibberish, with all the risks and fees in fine print. That’s why we’re here to break down one of the most common choices for people seeking steady income in retirement: Annuities. To help you out, we’ve compiled answers to some frequently asked questions.
What Is an Annuity?
An annuity is a contract between a person and an insurance company, designed to provide a steady stream of income over time. According to Investopedia, there are two stages of annuities:
The accumulation phase or the period when an annuity is being funded by you and/or by your employer, often by making regular monthly payments. You can start an annuity with as little as $300 per month. The insurance company then invests your money – also known as your premium – to earn interest. There is usually a minimum contribution period, such as ten years.
The payout phase kicks in during retirement and can vary from person to person. Upon retirement, you can choose to take up to 25%** of your accumulation as a tax-free lump sum, which can be used to clear your debts or help your children with their education; then you will receive a reduced monthly payment. Or you can opt to forgo the tax-free lump sum option and receive the full monthly payment instead. There is also the option to receive a fully commuted benefit at retirement, which is a one-time payment minus tax payable to BIR. However, this option is only applicable if your reduced monthly annuity is less than $500.00**.
What Are the Benefits of Annuities?
Annuities offer several benefits:
Steady Income Stream in Retirement: While you may be eligible for a government pension, that alone may not be enough to maintain your current standard of living. Annuities provide regular payments, so it’s almost like you’re continuing to receive a salary in retirement.
Savings: In Trinidad and Tobago, any contributions to an approved annuity are tax deductible, up to $60,000**. So, you can save on your taxes now and save for the future with an annuity.
Personalization: The best annuities allow you to tailor the product to your financial needs and risk tolerance. If you’re in the market for an annuity, look for one that gives you the control and flexibility to choose how your money will be invested.
Legacy: If you die before receiving income from your annuity, your loved ones will receive a return of your contributions or the fund value, whichever is greater.
** As per current legislation at the time of this article
What Are the Potential Drawbacks of Annuities?
While annuities have benefits, there are potential downsides. Not all annuity plans are the same, so beware of these pitfalls in your annuity search.
Fees and Charges: Some annuities come with fees, such as administrative costs on premiums paid. Look for an annuity where 100% of your premium will be working for you from your first deposit to your last!
Termination Charges: If you surrender an annuity within the first five years, there will be charges. In addition, BIR must approve your surrender and will also determine the tax to be deducted. To avoid having to surrender your annuity, be careful not to overcommit. You can start with a low, manageable contribution and, as your financial situation improves, you can increase the contribution later.
Taxes: Annuities are tax-deferred, not tax free. This means that you may have to pay tax during the payout phase, depending on your then level of income and existing legislation. However, at that time you’re likely to be retired and you may be in a lower tax bracket. So, any taxes will probably be lower than if you’d paid them during your career. If you do want to learn more about saving on taxes, review the tax credits available to you.
Investment Risks: Most annuity returns on the market are not guaranteed. Annuities may be invested in funds with varying levels of risk. Typically, less risky investments offer more stable returns, while more risky investments can fluctuate both up and down but usually give higher overall returns in the long run. When looking for an annuity, do your research and ask an agent about how your annuity will be invested, to ensure that it matches your risk appetite.
Complexity: The variety of annuity products and features can make them difficult to understand without professional guidance. Look for companies that have information clearly laid out on their websites and available agents to discuss the perfect annuity for you.
How Do I Start an Annuity?
Speak with an agent. Beware of any company that offers a one-size-fits-all annuity plan. Instead, set up a meeting where you can discuss your individual financial situation, retirement goals, and risk tolerance. Quiz the agent not just on the benefits, but on the potential drawbacks. If you’re not happy with their answers (or if the fees are too high), talk to someone else. Remember, the best agents will offer personalized, professional guidance that will help you meet your goals. Happy new year and happy savings!
