The need for deferred annuity has become necessary as available data from the National Pension Commission (PenCom) revealed that only 9.86 million out of the over 30 million workers in the formal sector and 89,327 out of the over 140 million informal sector workers had subscribed to Contributory Pension Scheme (CPS) and Micro Pension Plan (MPP) respectively.
The figure from PenCom showed that a total of 10.75 million out of the over 200 million Nigerians have structured retirement plan through Contributory Pension Scheme and micro pension plan.
A deferred annuity is a contract with an insurance company that promises to pay the owner a regular income, or a lump sum, at some future date.
Deferred annuities come in several different types—fixed, indexed, and variable—which determine how their rates of return are computed.
Withdrawals from a deferred annuity may be subject to surrender charges as well as a 10 per cent tax penalty if the owner is under age 59½.
Hence, at retirement, you will be paid on a monthly or quarterly, an emolument that can takes care of your personal needs without necessarily becoming a financial liability to others.
Deferred annuity can be used as business capital for business you may wish to start during retirement.
Workings of Deferred Annuity
There are three basic types of deferred annuities: fixed, indexed, and variable. As their name implies, fixed annuities promise a specific, guaranteed rate of return on the money in the account. Indexed annuities provide a return that is based on the performance of a particular market index.
The return on variable annuities is based on the performance of a portfolio of mutual funds, or sub-accounts, chosen by the annuity owner.
All three types of deferred annuities grow on a tax-deferred basis. Owners of these insurance contracts pay taxes only when they make withdrawals, take a lump sum, or begin receiving income from the account. At that point, the money they receive is taxed at their ordinary income tax rate.
The period when the investor is paying into the annuity is known as the accumulation phase (or savings phase). Once the investor elects to start receiving income, the payout phase (or income phase) begins. Many deferred annuities are structured to provide income for the rest of the owner’s life and sometimes for their spouse’s life as well.
Hence, before purchasing an annuity, buyers should make sure they have enough money in a liquid emergency fund.
Prospective buyers should also be aware that annuities often have high fees, compared with other types of retirement investments. Fees can also vary widely from one insurance company to another, so it pays to shop around.
Finally, deferred annuities often include a death benefit component. If the owner dies while the annuity is still in its accumulation phase, their heirs may receive some or all of the account’s value. If the annuity has entered the payout phase, however, the insurer may simply keep the remaining money unless the contract includes a provision to keep paying benefits to the owner’s heirs for a certain number of years.
On her part, an annuitant, Mrs. Okikiade Clara Kunbi said: “I retired 2020, December, precisely and I subscribed to annuity in 2022. Ever since that time, I have been receiving my annuity regularly. By 13th I receive alert. But the one that surprised me most was before our last festival, the company paid me ahead of time. So, my annuity provider is doing a very good job. Also they ensure that they meet their obligations to us as and when due. Actually I have introduced some people to annuity because of my experience with my provider.”
John Oyeyemi, who subscribed to deferred annuity while he still working, said he hopes to contribute for a period of 20 years as he aims to retire at age 60. He noted that the plan has helped him to be financially discipline as he has to meet with the contributions quarterly.
According to the commissioner for Insurance, Sunday Thomas, NAICOM has taken steps to raise about 100 actuaries, noting that, the industry would soon get to the point where firms operating without in-house actuaries will be debarred from underwriting annuity business.
He noted that, due to the technical nature of annuity business, it requires experts with analytical minds, which actuaries fit in.
To him, only a couple of the Insurance companies have an in-house actuaries and this is why the commission has intervened to stem the tide .
Thomas said, actuaries are needed to manage the annuity business which was becoming quite significance and almost accounting for 35 to 40 per cent in the insurance industry portfolio.
Managing Director/CEO, AIICO Insurance Plc, Babatunde Fajemirokun said, due to importance the firm places on annuity operations, the management of AIICO would continue to provide its customers, both existing and prospective, unwavering commitment to continue to deliver on its mission – creating the most compelling experience, offering best fit products and driving wholesome peace of mind.
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