<< Back to Insights

Annuity Decisions at Retirement – Your Options Explained

Retirement fund members face an important decision at maturity of their retirement fund with at least two-thirds of their retirement savings used to purchase a complusory pension annuity, providing an income during retirement.

While the annuitisation of a large portion of your savings is a given, members do have a choice on the type of pension annuity they would like to use to provide an income during retirement, each with their own pros and cons.

It is important that retirees consult their financial advisor when making this decision, to explore all the available options that would best suit their needs. The financial advisor would assess the appropariate product that will help reduce the risk of outliving the client’s capital while taking inflation, tax, marital status, health and retirement age into consideration, amongst others…

Let’s explore the key characteristics of the pension annuity options available to retirees:

Investment-linked living annuity:

This type of annuity allows you to continue growing your retirement savings in the market while drawing an income based on the growth of your investments and income needs.

It also has the flexibilty to choose a level of income that suits you at the start of the policy, provided that it falls between 2.5% and 17.5% of your investment, as stipulated by South African law. You can also choose how frequently you wish to receive this income (yearly, quarterly or monthly) as well as the investment portfolio.

The key risk of this type of annuity is the longevity risk. If a policy holder selects a draw down rate that is greater than investment performance generated, then the capital will be depleted fairly quickly and there is a risk of the policy holder out-living the capital.

It is a legacy product in that policy holders can nominate an unlimited number of beneficiaries. All remaining capital passes to heirs after death.

Guaranteed/Life annuity:

Guaranteed life annuities will pay a fixed income with annual increases for the retiree’s life, irrespective of how long they live (typically issued by a life insurer). That’s the biggest advantage of a life annuity in that your income, with inflationary increases is guaranteed for the rest of your life.

The downside, however, is that if you choose a life annuity with no guaranteed term, it is not a legacy product in that it is not designed to pay an inheritance to your beneficiaries, so once you and your spouse pass on, the remaining savings will accrue to the insurer. Life annuities do provide an option to select a gauranteed term (for example. 5, 10, 15 years) where your beneficiaries will receive an income for the remainder of the guaranteed term in the event of your death during the specified term. However, it is important to note that the higher the guaranteed term, the lower the initial income and vice versa.

Blended annuity:

A blended annuity is part living annuity part guaranteed/life annuity.

Selecting a combination of the two may be a good outcome where the retiree requires the benefits of both while managing the downside risk. For example, essential expenses could be covered by the guaranteed component, like medical aid, rent, insurance, while the living annuity component could provide more flexibilty and can be used for the retirees discretionary spending during retirement.

Policy holders would elect a level of income between 2.5% and 17.5% and receive one payment which includes both the guaranteed and flexible portion.

There is a strong argument to made that by blending a guaranteed annuity with investment-linked living annuity, it could potentially improve the sustainability of your income at most drawdown levels and allows you to draw more with less risk.

Agrarius - Historical Pricing