Andre Tuck, a Certified Financial Planner and Team Leader: Retail Investments at 10X Investments, says there are basically two types of annuities for retirees: guaranteed annuities (also known as life annuities) and living annuities. There are risks involved with each type – your choice depends on which risks you are willing to bear yourself.
1. Guaranteed annuity:
This is an insurance product that you purchase from a life assurance company. "The life assurer guarantees to pay you a specified monthly pension – which may escalate at a specified annual rate – for the rest of your life. This effectively insures you against longevity risk, which is the risk that you live longer than expected, as well as against investment risk, which is the risk of depleting your capital too soon due to inadequate investment returns,” Tuck says. He says that although you receive this pension until you die, the drawback is that your capital dies with you, and no money passes on to your heirs. “That is the risk you take: you – or, rather, your heirs – forfeit your savings in the event that you die sooner than expected, unless the contract incorporates a guarantee period or a spousal benefit,” Tuck says.
2. Living annuity:
This is essentially an investment product. “It transfers the risk and responsibility of securing an adequate income for life onto your shoulders. In return, you have greater investment and income flexibility and your heirs inherit whatever is left of your capital after your death – in other words, your capital does not die with you,” Tuck says. He says that by choosing a living annuity, you need to decide how to invest your savings within the basket of investments offered by your product provider. You must also choose the rate at which you want to draw an income from your investment. This is known as the drawdown rate, which, by law, must be between 2.5% and 17.5% of your capital per year. Problems arise if your drawdown rate is too high or the returns on the underlying investments are too low, or both. “Unless you have the necessary investment expertise, you should consult a reputable retirement planning tool or financial adviser on the appropriate drawdown rate and asset allocation,” Tuck says.
There are strategies you can consider that involve both annuity types. For example, you could apportion some of your savings to one type and the rest to the other. Or you could begin your retirement years in a more flexible living annuity and transfer to a guaranteed annuity later in life when you’re more dependent on a secure income.
Switching from a living annuity to a guaranteed annuity is permissible, Tuck says, but you cannot do it the other way around – once you are in a guaranteed annuity, in which you are assured a pension for life, you are committed to that product and that source of income.
You can also switch from one living annuity provider to another living annuity provider. “This is known as a Section 50 transfer,” Tuck says. “The transfer itself is cost-free, although there may be other costs, depending on whether you invest directly or via a financial intermediary.”
10X offers a low-cost living annuity in which you have six choices regarding the underlying basket of investments. To get an idea of the level of income you could earn from your savings, insert your own numbers into 10X Investments’ retirement income calculator. It will calculate what a sustainable income would be, taking your savings balance, your age, fees and inflation into account. For further assistance, speak to a retirement consultant.
