What is an annuity? One of the options upon retirement and the retrieval of your accumulated Bermuda National Pension is a plain vanilla annuity; that is a series of payments for a set number of periods or for life, guaranteed by the annuity issuer.How is it constructed? From a math perspective, it is actually fairly simple, and it looks like this. We will use the example of a 45-year-old individual, a lady, who started with the Bermuda pension plan in the year 2000, and will fully retire in 2015 with an estimated $70,000 pension benefit. This number was arrived at as follows - see accompanying chart:l Her salary is $50,000 per year.l Her employer started with a one percent contribution and a one percent employee match that was raised each year until the contribution and the match hit five percent for both participants.l There after, our lady’s pension continued to receive 10 percent of her salary every year.l We also assume that our lady’s salary remains the same over the demonstrated time frame, even though it is a given fact that generally employees receive salary raises. After all, why would anyone stay at the same job for fifteen years without additions in merit pay, possible bonuses, and so on?l She is also incredibly lucky. In this current economic environment, she still has full employment. Certainly, the numbers will be different if she has changed jobs, been made redundant, or had other contributing factors that lessened the total contributions over time.Readers will note that while our lady’s pension is invested in the moderate asset allocation, we have not counted that growth percentage over time into the equation in order to keep the examples easy to work with. Capital markets are uncertain. Each pension portfolio manager may achieve different results over the same time frame utilising the same moderate asset allocation mandate.The Next StepOur lady knows what her total pension accumulation is, and she must now make a decision on how she will receive this monthly pension.Currently, she has two options to choose from.l The first is the traditional annuity. Her lump sum accumulation will be converted to an annuity (monthly payments for a certain time frame) along with a current interest rate amount attached, and a fee charge from the preferred pension provider for guaranteeing the payments for the time prescribed.l The second is a drawdown account (investments) and is available in varied lump sum amounts from various preferred pension providers.While the choices may seem easy, in order to truly choose the right options for her retirement, however, it is extremely important to understand our lady’s complete personal financial profile. How will this annuity fit with the rest of her financial asset profile?A Quarter of the QuadrantWill it become one quarter of her retirement quadrant along with a home to live indebt-free, a steady income, and capital asset appreciation to control inflation for the future. Does she need those recurring payments immediately, or can they be deferred?What time frame should she choose for her annuity payments: five years, 10 years, 20 years, a monthly payment for the rest of her natural life? What will the differences mean for her annual budget?Should she convert the entire sum to an annuity, or leave it in the investment portfolio (a drawdown account) where it will continue to appreciate? Taking the annuity solution passes the risk of payment to the insurance company. Leaving the investment component intact gives a continued exposure to capital market risk.Who guarantees that this annuity will arrive, month after month, year after year? What happens if our lady lives longer than the total accumulation? How does the preferred pension provider (insurance annuity issuer) invest the money?What kind of fees do they charge?Are the annuity interest rates locked in, or are they adjusted according to market interest rate fluctuations?Her annuity is guaranteed, but who will guarantee the financial strength of the annuity issuer if the company has financial problems?Who is working with our lady to construct these investment products and what is their experience and background? Multinationals need to feel comfortable with the level of sales representative expertise in tax, investments, and pension portability challenges.It is important to also note that under the amendments to the Bermuda Investment Act that every pension representative in the pension provider product chain has a fiduciary responsibility to be sure that the recommendations for you are appropriate, and suitable for your personal financial profile.Warning for international financial planning for US citizens working and residing in Bermuda, Bermudians with dual citizenship with the US, green card holders and foreign nationals who are US residents for income purposes. Conversion to, purchasing foreign annuities, or rolling foreign pensions into US pension/annuity type plans are decisions that may be saturated with current and future US tax implications and complications.In this viral US Internal Revenue Service, and US Treasury global compliance environment, every financial strategy has significant tax outcomes. Do not even consider making this decision without consulting US tax practitioners/financial planners with international investment, tax and pension experience.This is a minefield that could have you caught in compliance reporting loops, with significant tax liabilities long after your local pension decision was implemented. Who can you seek recourse from then?Examples of annuity payments and calculations are hypothetical - for illustrative purposes only. These hypothetical illustrations cannot, nor should not, be used for your own personal financial retirement situation.Next: we breakdown the annuity payment structure, explore how the drawdown accounts work, and talk about when to consider taking your retirement.Martha Myron, JP CPA CFP (US) TEP, is an international Certified Financial Planner™ practitioner in private wealth management. She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with US and multi-national connections, and US citizens living and working abroad. She is a Masters in Law candidate in International Tax and Financial Planning and on the American Citizens Abroad Tax Advisory Council. www.americansabroad.org For more information, contact martha.myron[AT]gmail.com or 296-3528 at Patterson Partners Ltd.