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Pension: Tapping into annuity benefits

Nigeria has not had it rosy in the area of appropriate retirement plans for its citizens. Government took the burden of paying pensions to its…

Nigeria has not had it rosy in the area of appropriate retirement plans for its citizens. Government took the burden of paying pensions to its retired personnel but the system was poorly managed and was fraught with corruption hence its failure. Another reason for failure of the pension scheme was the lack of funds. At some point, the debt profile climbed to over N2 trillion.
But following the contributory pension scheme introduced by the Pension Reform Act 2004, as at December 2008, the pension fund peaked at N1.1 trillion. Based on this, the Director General of the National Pension Commission (PenCom) Muhammed K. Ahmad said the funds were secured and sufficient to pay retirees’ pensions at any given point in time irrespective of the prevailing economic crisis.
To help retirees manage their contributions (Retirement Savings Account, RSA) after they might have retired, the Pension Act provided that they have the options of buying life annuity products from insurance companies or engaging the funds in some programmed withdrawal over a period of time.
The idea basically is to ensure that pensioners enjoy benefits from their contributions and also have an income to meet basic needs after they retire.
Programmed withdrawal is a situation where the retiree structures his retirement savings to be drawn over a specified period of time after retirement. Usually, the retiree demands a fixed sum over a certain period when his savings would have been exhausted. The Group General Managing Director, Crusader Nigeria Plc, Mr Tola Mobolurin once put it bluntly, “Programmed withdrawal is playing God. How would you determine how long you would live and structure your payments within your remaining time on earth? And if you don’t die within the time frame (months or years) after you have finished drawing your retirement savings, what happens to you financially? How do you survive your remaining time on earth without a defined income?”
He said programmed withdrawal could create old beggars in case retirees who choose it live beyond their anticipated life time.
“I was talking with someone and he said they were asking them to spread their savings over 10 or 20 years, so I said if you retire at 50 and at 70 you have collected your pension, what happens between the age of 70 and 90? Withdrawing all is out of ignorance. If you live longer than that, what happens? You will be with no income. I advocate for the annuity option for retirees,” he suggested.
Annuity is a contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account.
All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawn without penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. Both are relatively safe, low-yielding investments.
An annuity has a death benefit equivalent to the current value of the annuity or the amount the buyer has paid into it. If the owner dies during the accumulation phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes in addition to estate taxes.
Insurance experts have held that annuities are better than programmed withdrawal. Chairman, Nigerian Insurers Association (NIA), Mr. Wole Oshin, had told worksop participants on Annuities Business organised by the association in Lagos, that annuities provide far greater guarantee, security and comfort than programmed withdrawal.
Oshin also explained: “In developed economies where life insurance contributes over 60 per cent of the total premium income of the insurance industry, much of the premium is from annuity business because it provides long term investible funds. So, the future of life insurance in Nigeria lies in the annuity business.”
Section 4(i) of the Pension Reform Act 2004 provides that a holder of a retirement savings account upon retirement or attaining the age of 50 years, whichever is later, shall utilise the balance standing to the credit of his retirement savings account for the following benefits:
(a) Programmed monthly or quarterly withdrawals calculated on the basis of an expected life span;
(b) Annuity for life purchased from a life insurance company licensed by the National Insurance Commission with monthly or quarterly payments.
In view of the fact that Section 4 of the Pension Act provides for compulsory annuity as an alternative to programmed withdrawal to be purchased by a retiree under the scheme, experts say this provision has undoubtedly created enormous opportunities for enhanced life insurance business.
Mr. Ezekiel O. Chiejina, the Director-General NIA explained, “What we have in the Act is compulsory pension annuity purchased from the proceeds of retirement saving account (RSA).  At the time of retirement, the retiree uses a lump sum from the balance in his or her RSA, and buys life annuity from an insurance company. 
“In return, the insurance company continues to pay the retiree [annuitant] a monthly or quarterly income for life i.e. until the retiree dies.”
He said pension annuity was made compulsory by the Act to ensure that the philosophy and objectives of the pension reform were achieved i.e. to ensure that when an employee retires, he or she will continue to receive income no matter how small until he or she dies. And it can also be transferred to ones next of kin in some annuity products.
Chiejina explained that the guarantee in the annuity clause meant that even if the retiree dies early, the income must be paid for a minimum period of 10 years, or the equivalent balance is payable to the nominated beneficiary or the retiree’s estate.  In fact, the regulation issued under the PRA provides for a minimum guarantee period of 10 years.
Several annuities as explained by Chiejina, include: “Guaranteed Annuity, Increasing Annuity, Annuity Certain, Temporary Annuity, Joint Life Last Survivor Annuity, Contingent Revisionary Annuity and Impaired Life Annuity.  There are also Immediate and Deferred Annuities.”
Although Pension Reform Act did not mention Annuity Certain or Temporary Annuity, the programmed withdrawal under the Act falls into these categories of annuities, especially the Temporary Annuity.
We also have Joint Life and Last Survivor annuity.  This may be used by married couple to provide for their retirement.  This product pays annuity for the joint lifetimes of the two annuitants as payment will continue, in full or at a reduced rate, after the first death.
There are also Contingent Revisionary Annuities whereby payments are made to a specified person commencing on the death of another specified person(s), subject of course to the former being alive.  This may typically be used for a husband and wife with annuity payable to the wife commencing on the death of the husband.
Annuities have come a long way since 1653. Taking time to understand how annuities work can help you decide whether they are right. Most annuities are long-term investment vehicles designed for retirement purposes. They are sold by prospectus. Be sure to read the prospectus carefully before deciding whether to invest.