What is Annuity?
An annuity is a financial product that pays out a fixed stream of payments to an individual. These financial products are primarily used as an income stream for retirees.
Annuities are created and sold by financial institutions, which accept and invest funds from individuals. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.
The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.
To really have an in depth understanding of annuity, let us define some key terms in annuity.
Annuity: This is a contract entered into between an annuitant and an insurance company which involves the purchase of a premium by the annuitant in exchange for a guaranteed fixed sum at periodic intervals for life or for some predetermined number of years.
Annuitant: This is the person to receive the annuity payment. He is usually the person who signs up for the annuity, but in some cases, an annuity can be made on behalf of another person.
Deferred annuity: This is an annuity that provides guaranteed income at a future date. A deferred annuity can be further broken down into a deferred fixed annuity and a deferred variable deferred.
a. Deferred fixed annuity: This offers a guaranteed minimum interest rate for the life of the contract. In Nigeria for example, most of the annuity agreements I have seen would guaranty an interest rate and periodic payment for a period of 120 months (10 years), and then after the initial guaranteed period expires, a renewal rate would be declared by the insurance company.
b. Deferred variable annuity: In a deferred variable annuity, your investment or contributions are managed by professional money managers. They invest in a range of investment options or asset classes.
You are given the opportunity to choose from the available investment options, and at the end of the day, the value you receive would depend on the performance of the investment option you choose.
Accumulation period: This is the period in which funds are built up for a deferred annuity. It is the period at which an annuitant contributes to his annuity and builds up the value of his annuity.
Loads: These are fees payable on the purchase of an annuity.
Payout Phase: This is the period where you begin to receive payments from your annuity account.
Principal: This is the amount used to purchase the annuity. In order words, it is the balance of your annuity account excluding any interest or returns the annuity might have gained.
Single life annuity: Annuity that covers payments when the annuitant is alive. The annuity is not transferable to a beneficiary, and monthly payment ceases when the annuitant dies.
As at August 2017, National Pension Commission (PenCom) had given approval to nine of the 26 life insurance companies to take fresh annuity business in the country.
The approved firms are:
AIICO PLC, Custodian Life Limited, FBN Insurance Limited, Leadway Assurance Limited, Cornerstone Insurance Plc, ARM Life, AXA Mansard Insurance Plc, Standard Alliance Insurance Plc and Niger Insurance Plc.
As at now, the cumulative annuity funds in Nigeria has risen to N170 billion, this is still considerably low considering Stanbic IBTC has over 1.4 trillion naira AUM. Nonetheless, a lot of retirees are now opting for annuity as a result of more favourable terms and conditions.
Contact us so we can advise you appropriately.