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Are you standing at the threshold of
your retirement or have you already retired and are wondering what your
investment options are? There is good news for those approaching
retirement or already retired. Along with other options including bank
deposits, bonds, mutual funds, stocks and real estate, annuities
present yet another opportunity in the Nigerian financial market.

In 2009, two regulatory bodies, the
National Insurance Commission (NAICOM) and Pension Commission (PENCOM)
jointly issued a document that regulates the conduct of annuity
business in Nigeria in compliance with provisions of the Pensions
Reforms Act 2004. The Act provides that a retiring employee is entitled
to receive retirement benefits through programmed withdrawals, by
purchasing a life annuity, or a combination of the two.

Most of the retirees under the 2004
pension dispensation opted for programmed withdrawals instead of life
annuities. Following the release of the new regulations, some life
insurance companies in Nigeria have responded positively to the call on
them to introduce annuity products to align with the economic realities
that retirees face and thus create a better pension environment for
Nigerian workers. It is expected that more retirees will adopt this
option.

An annuity is an important retirement
planning tool and is simply a contract between you and an insurance
company. In return for a sum of money the insurance company is obliged
to provide you with a steady and stable source of income for life. A
range of annuity products are now offered by life insurance companies
in Nigeria with various features. Choosing the “right” one for you is
dependant on your specific needs, preferences and financial standing.

Immediate or deferred annuities?

An immediate annuity is ideal when you
want the income to start right away whilst with a deferred annuity you
are building up value over a period of time to be converted to income
later on.

With a single life immediate annuity,
you deposit an amount with the insurer, who begins to make regular
payments. You choose a deferred annuity if you want to build your
account value over time and convert it to income in the future.
Deferred annuities can be bought with a lump sum payment or a series of
regular payments that could be monthly, quarterly, biannually or
annually.

In some plans, policyholders can choose
an increasing annuity at five percent per annum guaranteed for ten
years and thereafter for life. In others there is the option to choose
an increasing annuity at ten percent per annum guaranteed for ten years
and thereafter for life. By choosing an increasing annuity one is more
likely to be protected from the effects of inflation.

Income for life

Issues such as increased life
expectancy and anxiety over whether one’s savings may get exhausted
within one’s lifetime, are to a large extent addressed by annuities;
the reliable and steady source of life income offers comfort and a
sense of security almost replacing pensions as a reliable retirement
tool. Even those close to retirement age can still invest in an
immediate annuity and begin receiving income from it almost instantly
which comes with a tax deferral advantage.

Annuities offer some stability

Annuities are a dependable option for
those who seek some protection from the risk associated with the
investment of lump sum benefits and the chance of losing part of their
savings through investment failure that other options tend to suffer.
Assets are managed by professional asset managers who provide you with
variety of asset classes including mutual funds, stocks, money market
instruments, direct real estate and Real Estate Investment Trusts
(REITS), and combinations as appropriate. Naturally the value of your
annuity will vary depending on the performance of the underlying
investments.

Annuities have a place in estate planning

Annuities provide the option of leaving
money for one’s heirs after the death of the investor. A couple can
hold an annuity jointly and so after the death of one partner the other
will continue to receive income from the annuity. This gives investors
comfort in the knowledge that in the event of the death of one partner
the other will continue to be secure. A guaranteed death benefit
ensures the policy beneficiary will receive at least a minimum amount
if the original owner dies within the guaranteed period.

Whilst annuities can be a good
alternative with many advantages, as with all investments, there is a
downside that one should be aware of and which must be carefully
considered.

Annuities can be inflexible

Annuities are sometimes regarded as
inflexible retirement tools when compared to other options such as
bonds. Let’s assume you decide to invest your money in a diversified
portfolio of blue chip, corporate bonds. When you invest in bonds you
receive interest payments periodically, and thereafter, on maturity you
have your money back. There is also the option to sell your bond prior
to maturity. The difference is, that with an annuity, the full value is
surrendered to the insurance company in return for lifetime income; you
don’t necessarily have the right to get your money back. One continues
to have access to your money in a deferred annuity until you convert
your accumulated assets to a revenue stream.

Will the insurer survive?

Your annuity is only as certain as the
strength and solvency of the company you invest with. Insurance
companies are heavily regulated and the annuity business is closely
monitored by National Insurance Commission, and the Pension Commission.
Insurance companies are also rated by professional agencies; this
should also guide in your selection of a strong, reputable institution.
Further, an annuitant is able to change his or her insurer after two
years if they are dissatisfied or concerned in any way.

Be aware of charges

The set-up costs, commissions, and
annual investment management fees associated with annuities can be
confusing, making it difficult to decipher how much you are actually
paying. Ideal for providing stable steady income, they tend to be
limiting when it comes to catering to sudden significant expenses. If
you need the money sooner than expected, you will incur “surrender
charges” which can be steep. All these costs add up and will certainly
eat into any profits the annuity earns.

If all you want is an alternative source of income and are more
inclined towards a conservative, quiet retirement plan, then annuities
might be a good option. Before you enter into any transaction that is
hard to reverse, it is important to go through the fine print as
tiresome as this may seem. You must understand how it works and
consider it alongside other alternatives, so that you can make an
informed decision as to the one that is most appropriate for you. As
always, maintain a diversified portfolio and don’t put all your eggs in
one basket.</