Choosing between a living and a guaranteed annuity requires a careful evaluation of your personal needs, circumstances and priorities.
In this, you must consider a host of factors that are specific to you: your health, age and life expectancy, how much you have saved, your desired income (life style), whether you prefer a secure or a flexible income, your ability to make sound investment decisions, the needs of a financially dependent spouse, potential bequests, and, on a more subjective level, prevailing interest rates (which drive annuity prices), and – if you have strong views on this subject – the inflation and investment outlook.
Your major risk with a Living Annuity is that you outlive your savings. The lower your drawn-down rate, the less likely this will happen. The longevity risk is therefore primarily a function of your income needs relative to your savings. If you can maintain your lifestyle at a draw-down rate of 4% or less, you are unlikely to outlast your savings.
Financial planning tools such as the 10X Retirement Calculator can help you find your sustainable draw-down rate, based on your estimated life-expectancy and other parameters.
You must also be able to deal with the associated investment risk. This can manifest as either a poor long-term investment return, or as intermittent market volatility, forcing you to draw down on your savings during periods of market weakness (ie selling when prices are low). Both circumstances reduce the longevity of your savings, but less so if you can afford to reduce your draw-down rate during such times (possibly by calling on non-retirement savings to supplement your annuity income, or by cutting back on your expenses).
The bottom line: the Living Annuity is most appropriate if you are confident it will secure your life style through-out your retirement, however long that may be. This then also gives you the opportunity to pass on any remaining capital to your nominated beneficiaries.
But there are other factors to consider. If you are in poor health, you will probably want your money sooner rather than later. In that case, a Living Annuity with a flexible draw-down rate may suit you more. This also ensures that your capital does not die with you.
The same reasoning will apply if you plan to emigrate from South Africa post retirement, and you wish to get repatriate you compulsory annuity proceeds as quickly as possible.
Your age is also a factor. For example, if you retire young, a low-cost Living Annuity may serve you better than a Guaranteed Annuity as the latter will factor in your increased life expectancy and pay out less. But in your seventies, the Guaranteed Annuity is likely to pay out more, as your life expectancy has fallen. Fortunately, with a Living Annuity you always have the option to convert the balance (or a part) of your capital into a Guaranteed Annuity at a later stage.
Choosing the appropriate post-retirement product is probably the most important, and also most complex financial decision you have to make in your life. To compare alternate options, you should ideally consult an appropriate retirement planning tool (such as the 10X Retirement Planner) and/or a financial advisor before making your decision. Only obtain advice from a reputable financial organization, and separate the advice fee from the investment product you choose.
