Life and living annuities - consider combining the two

By Janice Roberts

For most people, retirement can be a new and unfamiliar phase of life. It can be very stressful transitioning from having a regular income, to having one pot of money that must last you for the rest of your retirement years. At the same time, we are living in a time where advances in technology and medicine mean we are probably going to live much longer than our parents and grandparents did. This is according to Yariva Ramdhani, Financial Planning Solutions Specialist at Old Mutual Wealth, who notes that while that is of course great news, it also means our retirement investments have to last a lot longer too.

“Results from the 2019 Old Mutual Savings and Investment Monitor indicates that 92% of retirees who partook in the survey, continue to work because they are dependent on the income. It is a fact that many retired people today are afraid that they will run out of money before they reach the finish line. If you retire at age 60 today, you can probably expect to live for at least another 35 years,” states Ramdhani.

To structure their income during retirement to achieve security and peace of mind, most people choose to invest in one of two options: a Life Annuity and Living Annuity. Ramdhani unpacks the two options below.

What is a Living Annuity?

A Living Annuity (LA) is an investment product that puts you in charge of your investment as your product provider gives you a basket of investments and you decide which ones to put your money in.

The advantage of a Living Annuity is that it gives you the flexibility to withdraw money according to your needs and in accordance with the living annuity withdrawal rule of 5% to 17%; change service providers or your investment strategy; switch to a guaranteed annuity and leave a legacy – whatever is left of your capital goes to your heirs after your death. It is important to remember that it is your responsibility to ensure you have enough income for the rest of your life.  If you want to keep control of your money, a Living Annuity is right for you – provided that you have the right expertise or that you find the right ongoing expert advice.

What is a Guaranteed Life Annuity?

A Guaranteed Life Annuity is an insurance product that provides you with a guaranteed income for the rest of your life. It is designed to take away the risk of managing your investments yourself – whatever the investment markets do, your guaranteed lifetime income will not be affected. However, you’ll need to sacrifice flexibility.

With a Guaranteed Life Annuity, you cannot draw money as you please or switch to another product. Also, the money runs out when you pass away. If you want your beneficiaries to receive income left over once you’re gone, you must specify that even if you pass away, the income will continue to be paid until a certain term. However, adding additional terms and conditions or guarantees for this annuity comes at an additional cost. If you are expecting to live longer and want the peace of mind that your retirement savings are being looked after without your having to make difficult investment decisions, especially in the event that your mental faculties begin to decline, then a Guaranteed Life Annuity is suitable for you.  Remember that in case of unforeseen expenses, lack of flexibility means you will not be able to draw additional money other than the set income that is contracted upfront.

A combined approach

From the above, Ramdhani states that neither a Living Annuity nor a Guaranteed Life Annuity offers the ideal retirement solution for all situations. “One is flexible but risky, the other provides long-term security but cannot help in emergencies. Fortunately, it is possible to have more flexibility and less risk by following a blended approach.”

Ramdhani provides these guidelines to assist individuals close to retirement to get peace of mind while keeping the flexibility they might need during retirement:

  1. Use Guaranteed Annuities for must-have expenses like medical aid, food and household.
  2. Use Living Annuities for nice-to-haves and long-term emergencies like holidays, cars and age-based illnesses.
  3. Use Discretionary Investments for short-term expenses and emergencies.
  4. Make sure your investment portfolio is focused on beating inflation. A personal investment target of three to five per cent above inflation is normally ideal; however, this does depend on the term of the investment and the return that you require to meet your financial goals.
  5. Prior to retirement and depending on the annuity type that suits you best, it is advisable to look at the investment volatility within your retirement funds annually to ensure that you are still on track to meet your retirement income needs. A Living Annuity will still be exposed to some volatility after retirement and your funds will have the opportunity to recover in the long term from any short-term negative returns. However with the guaranteed annuity, once you have retired the money is not exposed to any financial markets, and what you retire with is used to provide the chosen income for life. With the help of your financial planner, choose appropriate asset classes, managers and solutions to minimise the risk of large negative returns closer to retirement age.
  6. When it comes to withdrawing money from your Living Annuity, adopt an approach in line with the performance of your investment e.g. – Do not increase withdrawals after a negative year, – Put off ad-hoc expenses (e.g. travel, cars) after a negative year, – Give yourself a 10% real “raise” if your capital reaches 150% of the initial investment.

“Everybody’s circumstances are unique. Having a relationship of trust and understanding with a financial planner to work out a strategy that is tailored to your specific needs, goals and aspirations will help secure a better retirement for you.” concludes Ramdhani.

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