Planning Your Future with Annuities in Nigeria: What You Should Know

With life expectancy in Nigeria edging up to 55.44 years in 2022 from 55.12 years in 2021, and the population reaching 223 million in 2023, retirement planning gets real. Navigating retirement challenges, from sketchy planning and pension issues to societal biases and family dynamics, demands practical solutions.

Enter annuities, your potential shield against retirement uncertainties. In a retirement landscape where ages span 60 to 65 years, financial security matters more than ever. This article dives into annuities in Nigeria, highlighting what they offer practically.

Discover the upsides, downsides, and key factors to weigh. As traditional retirement norms evolve, annuities offer a practical path to a stable retirement future.

Annuity: The Definition

An annuity can be defined as a financial product that pays out a fixed stream of payments to an individual. These financial products are primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals. The holding institution will issue a stream of payments at a later point in time.

What should I look for in an annuity? When considering an annuity, the investor should look at the terms of the contract, the reputation of the insurance company, the fees associated with the annuity, and the potential return on investment.

The Different Types of Annuities

What are the 4 types of annuities? Broadly, annuities can be classified into four types:

  1. Immediate Annuities: With an immediate annuity, the annuitant starts receiving payments immediately upon investment. This is particularly beneficial for retirees who want a steady income stream right after retirement.
  2. Deferred Annuities: These are annuities where the payments begin at a future date. Investors can contribute to the annuity over time and only start receiving payments after a certain period.
  3. Fixed Annuities: These annuities offer a guaranteed payout, usually a fixed dollar amount or a fixed percentage of the principal (the amount invested).
  4. Variable Annuities: These annuities offer varying payouts, depending on the performance of the investment portfolio chosen by the annuitant.

Each type of annuity has its own set of advantages and risks, and the choice depends on the individual’s financial goals, risk tolerance, and investment horizon.

Annuities in the Nigerian Context

In Nigeria, the concept of annuity has a unique connotation. Here, there are two types of annuity plans – the annuity under the contributory pension scheme controlled by the National Pension Commission (PenCom) through the Pension Reform Act 2014, and private annuity that is excluded from the Pension Reform Act.

Under the PenCom-controlled annuity, a retiree is allowed by the law, after the receipt of his lump sum benefit, to purchase an annuity from an insurance company of his choice and to receive monthly benefits for life. Alternatively, they can choose to receive their monthly benefit through programmed withdrawal by leaving the money in the custody of their Pension Fund Administrator (PFA). After 18 years, they stop receiving benefits from the company.

Annuity and Life Insurance Companies in Nigeria

In Nigeria, there are numerous life insurance firms that underwrite annuity business. Some of these include:

  • African Alliance Insurance Company
  • AIICO Insurance, Capital Express Assurance
  • Custodian Life Assurance
  • FBN Insurance
  • Mutual Benefit Life Assurance
  • Old Mutual Nigeria Life Assurance
  • Royal Exchange Prudential Life Assurance
  • Standard Alliance Life Assurance
  • Tangerine Life Insurance
  • Coronation Insurance
  • Zenith Life Assurance, among others.

These companies underwrite both forms of annuities—those under the control of PenCom and private annuities.

Recommended read: 10 Optimal Retirement Plans for Business Owners

The Popularity of Annuity in Nigeria

In recent times, many retirees prefer annuity because it guarantees their payment for life. Also, with recent developments like the outbreak of COVID-19, many people, including owners of private businesses, are beginning to embrace savings windows like annuities. This growth in the annuity business now surpasses the insurance industry’s life premium, making annuity the cash cow of the life insurance business in Nigeria.

Benefits of Annuities in Nigeria:

  1. Guaranteed Income: Annuities provide a reliable source of income, ensuring a steady stream of payments for a specified period or throughout one’s lifetime. This can be particularly valuable for retirees who seek to supplement their pension or other income sources.
  2. Tax Efficiency: In Nigeria, annuity income is often tax-free, making it an attractive option for minimizing tax liabilities during retirement. This can result in higher effective returns compared to other investment options.
  3. Longevity Protection: Annuities offer protection against outliving one’s savings. With increasing life expectancy, annuities can provide peace of mind by ensuring income even if an individual lives longer than anticipated.
  4. Simplicity: Annuities are relatively straightforward financial products. They eliminate the need for active portfolio management and investment decisions, making them suitable for individuals who prefer a hands-off approach.

What is the risk of annuities?

While annuities come with their share of benefits, they are not devoid of risks. This is particularly true for a private annuity, which, unlike the PenCom-controlled annuity, has little or no security. If the underwriting company goes under, the annuitants (those who have invested in the annuity) have nowhere to fall back to. This risk is amplified if the annuity underwriting firms show signs of financial instability.

More risks include:

  1. Inflation Risk: One of the significant concerns with annuities is the potential erosion of purchasing power due to inflation. Fixed annuities may not keep pace with rising living costs, potentially impacting the real value of the received payments.
  2. Lack of Liquidity: Annuities are designed for long-term income, which means the invested capital becomes less accessible. Individuals must carefully consider their liquidity needs before committing a substantial portion of their savings to annuities.
  3. Interest Rate Fluctuations: Annuity payouts are influenced by prevailing interest rates at the time of purchase. If interest rates remain low, future annuity payments might not be as attractive as initially anticipated.

Key Considerations when Evaluating Annuities in Nigeria:

  1. Type of Annuity: Understand the various types of annuities available, including fixed, variable, and indexed annuities. Each type comes with its own features and risk profiles, so choose one that aligns with your financial goals and risk tolerance.
  2. Credibility of Provider: Ensure you select an annuity provider with a reputable track record and strong financial stability. Research the company’s history, customer reviews, and financial ratings to gauge its reliability.
  3. Fees and Charges: Examine the fees associated with purchasing and maintaining the annuity. These can include administrative fees, surrender charges for early withdrawals, and other related costs.
  4. Customization: Look for annuity options that can be tailored to your specific needs. Some annuities offer features like inflation-adjusted payouts or beneficiary options, providing more flexibility.
  5. Professional Advice: Consider seeking guidance from financial advisors or experts who understand the nuances of annuities in the Nigerian context. They can help you assess your financial situation and determine if annuities align with your overall retirement plan.

Calculating Your Annuities in Nigeria

Calculating your annuities involves a few key components, including the principal amount, the interest rate, and the payout frequency. There are annuity calculators at your disposal, but here is a simplified breakdown for you:

  1. Determine the Principal Amount: Decide how much money you want to invest in the annuity. This amount will serve as the principal.
  2. Select the Annuity Type: Choose between immediate or deferred annuity, based on your financial goals and needs.
  3. Calculate the Interest Rate: The interest rate, often referred to as the “annuity rate,” is the rate at which your investment will grow. This rate can vary based on the insurance company and prevailing market conditions.
  4. Choose the Payout Frequency: Decide whether you want the payouts to be monthly, quarterly, or annually.
  5. Use the Annuity Formula: The formula to calculate the annuity payment is:
    Annuity Payment = Principal × (Interest Rate / (1 – (1 + Interest Rate)^-Number of Payments)).
    Here, the number of payments corresponds to the total number of periods for which payments will be made.
  6. Consider Inflation: Keep in mind that the purchasing power of money decreases over time due to inflation. While the annuity payments remain constant, their real value may decrease.

Also read: 5 Simple but Powerful Steps to Build a Foolproof Retirement Savings


Understanding the basics of annuity is crucial for anyone looking to secure their financial future, particularly in retirement. By providing a steady income stream, annuities can offer financial security and peace of mind.

However, like any financial product, annuities come with risks and it’s essential to understand these risks before making an investment. Always do your research, understand the terms of the annuity contract, and consider seeking advice from a financial advisor to make the most of your annuity investment.

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