To buy or not to buy annuities?

Even individuals who have consistently saved or who have the advantageous position of belonging to a reputable employer with a retirement plan and building up a respectable amount of savings over time might not know how to manage their money safely while still making sure it is sufficient to meet their daily needs.

Every year, hundreds of Ugandans reach retirement age without a steady monthly income after quitting their jobs, and many are clueless about how to optimise their assets and prepare for their future.

The Uganda Retirement Benefits Authority’s (URBRA) Annual Retirement Benefits 2021/22 report shows that slightly more than three million (3.01 million) people have retirement benefits arrangements, the majority of whom are private, formal sector workers covered under the National Social Security Fund (NSSF), leaving the majority vulnerable to financial insecurity in their later years.

Annuity plan
There are now options available to help people plan for retirement; one of which is the annuity plan that provides a guaranteed income for life in retirement.  An annuity can provide predictable income as well as the potential for asset growth.

An annuity plan - a life insurance policy that offers a guaranteed income stream for a predetermined amount of time or for the duration of the policyholder’s life. An annuity, however, can be a good option if you are getting close to retirement and need to guarantee your financial stability after you stop working.

Anyone who has saved money for retirement through National Social Security Fund  (NSSF), private retirement benefit schemes, corporations, or any other type of savings or investment outlet who would like to have a consistent income stream in retirement is eligible to get an annuity plan.

The annuity plan is meant to guard against outliving you while increasing your retirement income. These are long-term investment contracts from an insurance provider. Annuitisation provides regular payouts as income in exchange for your investment.

Annuitisation transforms a one-time investment into a consistent, reliable revenue stream in the future.

As an insurance product, annuities are long-term investments that provide guaranteed monthly income payments throughout the period of the contract.
A pension sector player who preferred not to be named defines annuities as monthly payments, quarterly payments, and half-yearly payments on a pension scheme. 

These are payments which are planned based on the performance of the fund or draw downs out of a fund and they are the opposite of what is called a lump sum.

 “Uganda’s pension scheme, the NSSF one is a lump sum payment and you are given all your money at once.  Other countries have annuities on the pension scheme which can also be an annuity where you are paid money until the end of your time,” Mr Emmanuel Mwaka, the chief executive officer of ICEA Lion life says. 

 He adds: “The government pays out the pension, where you receive one-third as a lump sum, and then the two-thirds of what is remaining in the pot is paid to you as an annuity until you pass on.” 

Defined benefits
 But most annuities are run with pension schemes that are called defined benefits. The NSSF is a defined contribution.

 The difference between the two is that in a defined contribution; you define the contribution that is paid in and what you then get out is determined by the investment. That is why NSSF must invest and get a good return in order to give its members a good benefit. 

 However, if you are in a defined benefit scheme, then it defines what you will get out but it does not define what you put in. 
 In the case of government, the members don’t put in anything. It  is all paid by the government, but the government guarantees what they will be paid. The government uses a formula to determine how annuities are paid. That is why they call it a defined benefit. 
 Most defined benefits are also annuity funds whereas most defined contribution funds like NSSF are lump sum payments. 

 “What is the difference? The difference depends on who you are. 
If you are contributing to NSSF as an employer, it is the best arrangement because you put in 5 percent the employer puts in 10 percent. Then  the risk is on the member because the member is the one who is going to get the money at the end. The risk is also on the NSSF which is going to make the investment,” he explains.

  In addition, depending on how the fund performs, then the member receives whatever tnhe Fund declares. 
 However, for a defined benefit scheme like that of the government or Bank of Uganda, the risk is taken on by the employer. 

This he says is simply because they don’t even invest the funds but in other institutions such as Bank of Uganda, they invest the funds. 
 Regardless of what the fund performs, they have to pay what has been defined within the law.

 “An annuity is for those who don’t take any risk. This means that it would cost a lot to the employer. That is why most countries don’t like moving away from defined benefit schemes to defined contribution schemes,” he adds. 
   
Value of annuity plan
Ms Lydia Mirembe, manager corporate and public affairs, Uganda Retirement Benefits Regulatory Authority (URBRA) says when one leaves active employment and retires, they will usually get their retirement benefits in a lump sum payout – that is if they have been saving with a provident fund.

There are higher chances that most people lack the ability and the discipline to manage these lump sum payouts. 

“People don’t know how to deal with such large sums of money at once. So they make mistakes. The market offers products that can help retirees manage their savings better, and that is where the annuity plan comes in,” Mirembe says. 

Under this arrangement, you take your lump sum to an insurance company and they start paying you at agreed intervals, for the rest of your life. Your savings are therefore stretched out to cover the duration of your life in retirement.
An annuity helps retirees to manage their savings to cover their life in retirement.

Cushioning yourself
There are situations when the money got in lump sum is diverted to other purposes. However, you can cushion yourself from spending all your pension money. 

Ms Mirembe says indeed many elderly people also parent their grandchildren.
“This may be caused by different circumstances, for instance if the parents of those children migrate to look for opportunities, leaving the children in the care of their grandparents; or if the parents die,” she explains.

To avoid such scenarios, those who are still able should save and invest prudently, in order to attain financial independence in old age.