By Linda Blom and Yusuf Moosa, 7 December 2020
Understandably, retirees are looking for the highest level of guaranteed income that their savings can buy, with the added advantage of their income keeping up with inflation. Most importantly, retirees want to ensure that their monthly income needs are met without added risks.
Many factors determine the initial guaranteed income of a life annuity, such as:
A life annuity provides a guaranteed income until you die, irrespective of the age you reach. The term on a life annuity determines the minimum years of guaranteed payment if you pass away within the guaranteed term. This ensures that your beneficiaries will receive an income for the remainder of the guaranteed term that you chose when you made the investment – either 5, 10, 15 or 20 years. The higher the guaranteed term, the lower the initial income and vice versa.
If you choose not to have a guaranteed term, there will be no further income payments to your beneficiaries when you pass away. This option will provide the highest initial income, but higher doesn’t necessarily mean that it’s better.
Bob retires at 65 and invests R1 million in a single life annuity with a 5% annual increase in income. His initial monthly income for the various available guaranteed terms is illustrated in the table below:
As you can see, the initial income decreases as the guaranteed term increases. So, it may seem that the value of the shorter guaranteed term is the better option as the income is higher, but this would depend on your individual circumstances and needs.
Let’s say Bob decides on the 20-year guaranteed term and then passes away in the fifth year. His beneficiaries will receive a monthly income with an annual escalation of 5% per annum for the next 15 years. Essentially, the chosen guaranteed term of 20 years means that the insurer must pay an income for at least this period. A starting income of R6 367pm, escalating with 5% per annum over a period of 20 years, equals total of income payments by the insurer of R2 526 371. This is more than 2.5 times the amount he invested.
If Bob lives longer than 20 years, he will still receive a guaranteed income until he dies. The risk of his longevity, therefore, is carried by his insurer.
Your choice depends on your individual circumstances. You need to know the answers to the following questions:
As we’ve illustrated, retirees’ varied income requirements set the scene for a well-rounded, diversified retirement income portfolio that could consist of multiple products.
In most cases, a single product or solution will not tick every box for you. So, combining retirement income products and features can ensure the best outcome for your retirement.
Your financial intermediary will blend a solution based on financial goals that are unique to your specific needs.