BENEFITS OF BLENDING

Solving the life versus living annuity debate

If you invested your retirement capital in a living annuity, you are able to change your ‘drawdown rate’ annually on the anniversary of your policy. This is the rate at which you draw down from your investment to give yourself an income for the next twelve months.

With the cost of living constantly increasing, it is very tempting to increase your drawdown rate when your anniversary rolls around. However, this can be very detrimental to your overall financial wellbeing.

In practical terms, an increase of just one percent, say from 6.5% of your capital to 7.5%, could significantly threaten your ability to have a sustainable income for life.

SUSTAINABLE PENSIONS

However, if you really do need to increase your monthly income, there are new options in the retirement income space that allow for a higher income with less risk to your longterm financial security.

Retirement income specialist Just SA developed a new-generation, with-profit life annuity that could enable you to increase your monthly income by up to 25% on purchase. In return for the higher income, you would need to forego the flexibility of changing your drawdown rate each year.

If you value flexibility, consider a hybrid or blended annuity that offers a combination of a living annuity and a life annuity.

“By purchasing a blended annuity, pensioners can choose where they want to position themselves on the risk spectrum between needs and wants, as blended solutions allow them to decide how much of their living annuity portfolio should be allocated to the guaranteed component, and how much should be invested in the market,” says Just SA CEO Deane Moore. “This gives them full discretion to increase their longterm capital growth to meet flexible financial needs or to leave a legacy to beneficiaries.”

A PRACTICAL EXAMPLE

A financially astute couple, a 65-year-old male and a 61-year-old female, have R6m in retirement savings. They calculate that they need a retirement income of R20 000 per month, being around 65% of their final pre-retirement household salary, to live comfortably in their golden years. This equates to a drawdown rate of 4% per annum.

The other option is for the couple to secure a with-profit life annuity, giving them an initial R25 000 per month (a rate of 5% in normal market conditions) that is guaranteed for life, with 100% of the income payable while either one is alive. The monthly income never decreases, and the couple is eligible for annual increases on this income, which can never be less than zero. This offers good protection against inflation.

A blended annuity will allow them to allocate a portion of their capital to a lifetime income portfolio within a living annuity investment vehicle, which operates the same as a with-profit annuity. If the couple allocate50% to the lifetime income portfolio, at a 4% drawdown rate, they can secure an income of R22 500 of whichR12 500 is provided by the lifetime income portfolio.

In this way, the couple has retained some flexibility, improved the sustainability of their retirement income, and mitigated both longevity and investment risk.

GRAPPLING WITH THE ANNUITY DEBATE

At retirement, investors must grapplewith choosing which annuity is bestfor them, even if annuity optionsare pre-selected by the trustees ofa retirement fund. Once the choiceis made, current regulations do notallow living annuities to be split afterretirement. There is, however, theoption to transfer a living annuity to aprovider who offers a blended annuitywith a lifetime income portfolio.

A blended annuity may serve as agood choice for pensioners lookingto balance a guaranteed sustainableincome with flexibility. It is also notan all-or-nothing decision as it ispossible to increase the allocation tothe lifetime income portfolio at a laterstage without splitting the annuity, inline with regulations. •