For many this debate has been ongoing – should an investor opt for a life or living annuity in retirement? This question has been asked a lot more in the last seven months when we saw a global market correction. Many retirees were suddenly faced with lower investment values when their income reviews were due. A very hard and real decision had to be made to get along with less income and to cut down on living expenses.
There were questions such as “what are my options?”, “do I still have options?” and “how do I make this work?” The straightforward answer is, yes, there are options for many and yes, something can be done. Sometimes it is not a pleasant thing to do, but it might be the best possible outcome.
If you opted for a fixed interest (guaranteed) annuity upon retirement you don’t have any options. If you have an investment-linked life annuity (ILLA) you still have the option to convert this into a life or hybrid annuity.
Within a guaranteed annuity, you use your capital to buy a guaranteed income for life. These do not allow access to capital and at death, the insurance company keeps the balance of the investor’s retirement savings (unless the option to leave a portion of income to a living spouse is exercised). In many instances, the income is chosen to be reduced to 75% because generally the monthly expenses become less and it offers a higher income at inception for both parties.
With an ILLA there is a very real risk of running out of money before the investor dies due to the drawdown percentage being too high. The current advisable drawdown is between 4-5% of your capital. With the current market conditions, higher inflation and lower expected investment returns investors are now faced with the scenario where their capital is depleting in real terms and their incomes will become less and less in the years to come.
A hybrid annuity provides a flexible set of options to balance between self-insuring and being insured for retirement. Many financial institutions now offer such an annuity that conforms to the default regulations and balances retirees’ need for income security with their desire to leave a legacy to their loved ones. This solution hosts both a living annuity and guaranteed life annuity in your configuration.
The future annuity income escalations (from the guaranteed annuity portion), rest on personalised portfolio construction and return results, which allows for flexibility and higher annual income escalation. The hybrid option also provides for partial capital conversion from an existing living annuity at any given time and provides a much more transparent and comparable cost structure. The remaining investment capital in a living annuity can still be bequeathed to beneficiaries and the medical underwriting available on some guaranteed life annuities could now result in a higher monthly annuity income payment, from the insurer.
Within the very difficult times retirees are facing, exploring your options is advisable. It might allow from some peace of mind knowing that you have a guaranteed income for the rest of your life (with possible increases) instead of the possibility that you might run out of capital and income in the next couple of years.
All investment options have different regulations and benefits. It is advisable to consult with an accredited, qualified advisor to make a choice best suited to your personal circumstances.
