By Emmanuel AWOTWE
Retirement should be a time for financial security, but for many Ghanaians, the reality is far different.
Despite reforms by the country’s regulatory body, National Pensions Regulatory Authority (NPRA), to address this by the introduction of the three-tier system, there is still a serious gap, the underutilization of the annuity market.
Most retirees risk outliving their money without a strong system for converting their retirement savings into lifelong income streams.
What are Annuities and why are they needed?
According to the IRS.gov, an annuity is a contract that requires regular payments for more than one full year to the person entitled to receive the payments (annuitant). It is a financial product that converts a lump sum payment into a series of guaranteed payments, usually annually, for life.
One main risk that annuities protect against is the risk of outliving your savings. In countries where annuities are common, it is a major source of income security usually for retirees.
For a country like Ghana where most retirees solely rely on the Social Security and National Insurance Trust (SSNIT) payments, annuities could offer another path to financial security for retirees.
Retirees will purchase the annuity using the lump sum they receive, and the annuity will pay periodic amounts either monthly or annually until the lump sum is exhausted, or on death, depending on the type of annuity.
Although Ghana only has immediate annuities, there are other types of annuities.
Fixed Annuity (FA) offers a guaranteed interest rate and fixed payments as well. The lump sum grows at a fixed interest rate and fixed payments are made to the annuitant. Because the payments are fixed, retirees can predetermine how much is enough to carry them through retirement.
Variable Annuity (VA) allows the annuitant to invest in the market through stocks, bonds or money market funds. The returns are based on the performance of the investment type you choose. One benefit is that you can purchase riders that guarantee payments regardless of the market performance.
Indexed Annuities (IA) usually offer a minimum interest rate that the account can earn and the returns are linked to the stock market. They offer the potential to earn more than FAs and they also have less risk than VAs
The Current State of Annuities in Ghana
Although the Pensions Act and other regulations make provisions for annuities, the market for annuities is not readily available. Under the 3-tier scheme, tiers 2 and 3 usually pay out lump sum amounts to contributors upon retirement (Tier 2) or after 10 years (Tier 3). Given that tier 2 is mandated by law, having annuities available to invest these lump sum payments will be beneficial to retirees.
A few life insurers have introduced annuity plans but the average Ghanaian is yet to understand what they are, and how they stand to benefit. Also, currently, only immediate annuities are being offered, leaving the other forms of annuities such as Deferred Annuities and Variable Annuities untapped. According to the NPRA, in the June 2021 issue of The Pensions Digest, Old Mutual Insurance company was the first to launch an annuity in Ghana.
Why Annuities Are Not Popular Amongst the People
We look at some factors that influence the weak market for annuities in Ghana
- Low Awareness and Education. Many retirees either do not understand what annuities are, or do not know how to access annuity options in the market. The whole concept of handing over a lump sum to a financial institution in return for periodic payments is foreign to many retirees in Ghana
- Lack of Trust in the Financial Industry. Many Ghanaians do not have trust in the financial sector, especially the insurance companies. Handing over a lump sum to these institutions is usually not a pleasant idea to them.
- Macroeconomic Challenges. High inflation, frequent currency fluctuations and the limited long-duration investment vehicles also make it difficult for financial firms to offer annuities to the public.
- Informal Sector Exclusion. Majority of Ghana’s workforce are in the informal sector which means they lack regular pension contributions. This makes it difficult to raise the lump sum needed to purchase an annuity.
What Needs to Change
Although regulators have taken a step in the right direction with the introduction of the 3-tier scheme, more work needs to be done to ensure the returns are handled properly to provide financial security of retirees. The reasons below could help address the issues raised above.
- Expanding the laws to allow for the sale of other types of annuities is a major step that needs to be taken.
- Building public trust in the insurance industry by offering transparent pricing, stronger governance and enforcing contractual obligations will help increase utilization.
- The informal sector provides a large untapped market. Offering flexible products is one way to attract this sector. Creating an avenue for them to convert their matured savings products into an annuity is a step in the right direction.
- Hiring qualified actuaries to help with pricing annuity products will help expand the market as well as using well trained agents to market these products
Conclusion
For Ghana to truly deliver on the promise of pension reform, annuities must be a major tool. Regulators, Financial companies and the public must work together to ensure that retiring with dignity is not the privilege of a few but the right of all.
References
Internal Revenue Service. (2025). Annuities, A Brief Description. https://www.irs.gov/retirement-plans/annuities-a-brief-description
National Pensions Regulatory Authority. (2021, June). Workers & Pensions. Pensions Digest, 2, 2, 20-21. https://npra.gov.gh/assets/documents/Pension-Digest-Vol.-2-Issue-2.pdf
Emmanuel is a graduate from the University of Wisconsin Milwaukee and an Associate of the Society of Actuaries. I currently work with Corebridge Financial with experience in Individual Retirement and Annuities.
