by Ryno Crous
When you decide to retire, you will have to choose between two products, either a Guaranteed Annuity or a Living Annuity, which will provide you with an income during retirement. The retirement funding vehicle you decide on will be funded by your accumulated retirement savings at that point, i.e. retirement annuities, pension/provident funds and preservation funds.
Advantages of a Guaranteed Annuity:
– Guaranteed to receive a specified monthly pension for the duration of your life.
– Eliminates longevity risk (living longer than your income is expected to last).
– Eliminates market risk (money depletes prematurely due to unfavourable investment returns).
Disadvantages of a Guaranteed Annuity:
– The income is paid until you pass away, and no portion of the investment capital is paid to surviving heirs. If you pass away sooner than expected, the initial capital invested falls away without having served as an income for an extended period of time during retirement.
– However, you can opt for a guaranteed annuity that will continue to pay for a specified term after you pass away, or that will pay to a spouse in your stead (at a reduced rate of income). Generally, the more features/protection you attach to a guaranteed annuity, the smaller the income you will receive every month.
Lastly, the rate of income you will receive within a guaranteed annuity product will differ between the various life assurance companies. This means that you could receive a different rate of income based on the same initial investment across the assurance industry. Providers take several factors into account when establishing your annuity rate, namely but not limited to:
o Age: The longer your life expectancy, the lower your income.
o Gender: On average, women have a longer life expectancy than men, which means that they usually receive a lower income rate.
o Interest Rates: The higher the prevailing interest rate, the higher your monthly income will be.
Advantages of a Living Annuity:
– The income you receive is flexible in that it can be adjusted on an annual basis, within legislative limits (between 2.5% and 17.5% of the capital per annum).
– You have greater investment flexibility with this product, as you can decide on the underlying portfolio of funds in which your capital will be invested.
– Should you pass away during the investment term, your nominated beneficiaries will inherit the residual capital in the investment.
Disadvantages of a Living Annuity:
– There is a longevity risk when investing in a living annuity, as you could outlive your savings since there is no guaranteed income protection.
– There is a market risk linked to this product, as volatility and poor returns can erode your capital if your chosen annual rate of income is more than the return achieved within the investment during any given year.
When choosing between the two vehicles that will provide you with a post-retirement income, it is important to consider your unique circumstances such as your life expectancy, existing retirement savings and investment outlook. As there are numerous factors to keep in mind, it is best to speak with a trusted financial advisor who can assist you in navigating the options available to you and create a financial plan to specifically cater for your individual needs before and after retirement.