I OFTEN receive calls on my radio show from people who have maturing endowment policies and retirement annuities and are unsure what action to take. I hope today's article will simplify matters.
The insurance company sends you a letter advising the options available now that the policy has matured. You are given the choice of a wide range of investment options, one of which is to leave the policy with the insurance company, with or without future premiums or to cash the policy in.
At this point, it is important to clarify if there will be any additional fees or commission charged should you continue the policy.
The advantage of such a policy is that you can extend it for as long as you choose once it has run its 5-year course, which is the minimum and maximum period that you should ever commit to. For those who are unsure whether they'll need the money in the short term, the investment portfolio should be changed to something much more conservative, for example, the money market.
Investors who have a longer time horizon should take another look at their portfolio and make investment decisions based on their future expected time- frame. If you do not need the funds, then do not cash in the policy, even if you don't pay any future premiums.
With an annuity, at retirement you need to make a decision regarding the purchase of your pension. While the insurance company will offer certain options on maturity of the retirement annuity, only one-third of the proceeds may be taken in cash, subject to certain tax conditions. The remaining two-thirds must be used to buy an annuity, also known as a pension.
While the matured policy offers some flexibility to make changes during the course of the investment period, once a fixed pension has been purchased, such pension is payable for the rest of your life, or for the minimum guarantee period selected. Therefore, once this type of pension has been bought, you are then bound by the terms and conditions and cannot change that decision in the future.
Factors affecting the pension to be received are: age at retirement and, more importantly, prevailing interest rates at that time.
When interest rates are lower, as is the case now, then your annuity is fixed at a lower level.
Most people are unaware that at retirement, you have the right to shop around to find the highest annuity available, and then to purchase that annuity, even if it means moving from the company where the original retirement annuity was purchased.
Therefore, my advice to anyone receiving a letter informing them about the maturity of a retirement annuity would be to take the time to shop around to find the best possible annuity before making any decision, irrespective of whether pressure is being applied by their insurance company, or broker, to make a quick decision.
l The writer is financial adviser of Bryan Hirsch Cooley and Associates.E-mail firstname.lastname@example.org or telephone 011-880-4888.