Maya Fisher-French looks at how to leave a legacy while guar­an­tee­ing your in­come in re­tire­ment

CityPress - - Business -

Peo­ple gen­er­ally have two fears when it comes to re­tire­ment: whether they will have suf­fi­cient in­come dur­ing re­tire­ment, and what will hap­pen to their re­tire­ment money if they die dur­ing early re­tire­ment. In the case of a life an­nu­ity, the in­come stops when they die (un­less they had a joint an­nu­ity with their spouse) and their chil­dren re­ceive no in­her­i­tance from the par­ent’s life sav­ings.

For this rea­son, liv­ing an­nu­ities have be­come popular prod­ucts. A liv­ing an­nu­ity in­vests the lump sum in a mar­ket-re­lated in­vest­ment and the re­tiree might draw down any­where from 2.5% to 17% of the cap­i­tal each year. The in­vest­ment has the op­por­tu­nity to grow at above in­fla­tion as it is mar­ket-linked. Should the re­tiree die leav­ing cap­i­tal, this amount can be paid to their ben­e­fi­cia­ries. Un­for­tu­nately, be­cause so few peo­ple re­tire with suf­fi­cient cap­i­tal, they are forced to draw down more than the rec­om­mended 5% to 6% a year and many re­tirees out­live their cap­i­tal.

In com­par­i­son, a tra­di­tional life an­nu­ity pays a guar­an­teed monthly in­come for the rest of your life and can be linked to in­fla­tion so you are guar­an­teed to con­tinue to re­ceive an in­come – but it can­not be left to your chil­dren.

Nearly 80% of re­tirees are now opt­ing for liv­ing an­nu­ities. Although this might be a de­sire to leave a legacy, the re­al­ity is that most re­tirees have not saved enough to pur­chase a suf­fi­cient guar­an­teed in­come and need to draw down ag­gres­sively on their cap­i­tal in re­tire­ment, leav­ing them des­ti­tute in later years.

This has be­come so per­va­sive, the Trea­sury has raised con­cerns about the mis-sell­ing of the prod­uct, re­sult­ing in the re­tire­ment in­dus­try re­turn­ing to the draw­ing board to find new so­lu­tions that blend the pos­i­tive as­pects of a guar­an­teed in­come with those of mar­ket-linked in­vest­ments. We should con­tinue to see more in­no­va­tion around re­tire­ment prod­ucts over the next few years.

Hy­brid an­nu­ities

Glacier by San­lam In­vest­ment-linked Lifetime In­come Plan

This prod­uct is for an in­vestor who wants to know their money will not run out, and also wants the ben­e­fit of a po­ten­tially higher in­come in re­tire­ment.

The prod­uct blends the ben­e­fits of an in­come for life with the po­ten­tial for above-in­fla­tion in­come by link­ing the an­nual in­come in­creases to un­der­ly­ing mar­ket re­turns. If there has been a strong mar­ket per­for­mance, a re­tiree could see their an­nual in­come in­crease ahead of in­fla­tion – but like any in­vest­ment, with any up­side comes the risk of down­side.

If the un­der­ly­ing in­vest­ment de­liv­ers a flat or neg­a­tive re­turn, a re­tiree could see their in­come dip as costs still need to be de­ducted, ir­re­spec­tive of re­turns. But if, over time, the mar­ket de­liv­ers above­in­fla­tion re­turns, the re­tiree would have a sig­nif­i­cant in­crease in their in­come over time. The risk would be for a mar­ket cor­rec­tion in the first or sec­ond year of the in­vest­ment.

Like a tra­di­tional life an­nu­ity, the in­come dies with the re­tiree or the spouse and would not pro­vide for leav­ing an in­her­i­tance – but, given the cur­rent re­tire­ment statis­tics from the 2013 Old Mu­tual Re­tire- ment Survey, which found that 45% of re­tirees ex­pect to run out of money in re­tire­ment, leav­ing a legacy is not nec­es­sar­ily an op­tion for most re­tirees. Lib­erty Flex­i­ble An­nu­ity

This is for some­one who wants to have some form of guar­an­teed in­come and leave a legacy. The Lib­erty Flex­i­ble An­nu­ity aims to pro­vide re­tirees with some pro­tec­tion against out­liv­ing their cap­i­tal, while also pro­vid­ing them with an op­tion to leave some form of in­her­i­tance. When in­vest­ing in an in­vest­ment-linked liv­ing an­nu­ity, a re­tiree can com­mit a per­cent­age of their re­tire­ment sav­ings to the “in­come en­hancer ben­e­fit”. The com­mit­ment by re­tirees who have died forms a bonus pool that can pay out an­nual bonuses. This bonus can be used to sup­ple­ment the re­tiree’s in­come or be added to the re­tire­ment in­vest­ment for growth. When the re­tiree dies, the bal­ance that re­mains in the in­vest­ment-linked an­nu­ity that was not com­mit­ted to the “in­come en­hancer ben­e­fit” is paid to their ben­e­fi­cia­ries. Old Mu­tual Liv­ing An­nu­ity with In­vest­ment Top-up This is for some­one who wants the flex­i­bil­ity of a liv­ing an­nu­ity, and also some pro­tec­tion against longevity. The In­vest­ment Top-up can be taken out in con­junc­tion with a liv­ing an­nu­ity and pro­vides a lump sum on sur­vival to a cer­tain age. You would use a por­tion of your liv­ing an­nu­ity in­vest­ment (max­i­mum of 8%) to pur­chase a sin­gle pre­mium guar­an­tee to pay out a lump sum should you reach a cer­tain age. The min­i­mum age you can se­lect is 75 and the old­est is 95. This al­lows for bet­ter fi­nan­cial plan­ning as you can se­lect a lump sum to kick in, for ex­am­ple, at the age of 80. You would then be able to struc­ture your liv­ing an­nu­ity to pro­vide an in­come un­til that age. If you die be­fore the age you se­lected, no ben­e­fit is paid out. Old Mu­tual also of­fers a life an­nu­ity with a death ben­e­fit (cap­i­tal preser­va­tion), which pays out a lump sum on your death so you are still able to leave your chil­dren an in­her­i­tance while guar­an­tee­ing your in­come. As this prod­uct does not re­quire un­der­writ­ing, it might be less ex­pen­sive to take your own life cover if you are in good health. Alexan­der Forbes Lifestage An­nu­ity

This uses fi­nan­cial plan­ning to com­bine a liv­ing an­nu­ity with a life an­nu­ity. Ac­cord­ing to Alexan­der Forbes, it is worth­while con­sid­er­ing the mer­its of a hy­brid an­nu­ity, which in essence al­lows you to ini­tially invest in a liv­ing an­nu­ity, then con­vert to a life an­nu­ity sev­eral years after re­tire­ment. By ini­tially in­vest­ing in a liv­ing an­nu­ity, you are able to al­low your money to grow (as long as you do not draw down too much) and the an­nu­ity rates, or “im­plied yield”, you re­ceive from a life an­nu­ity in­crease the later you invest.

The later you an­nui­tise, the higher the yield (or in­come as a per­cent­age of your lump sum in­vest­ment) as you are fund­ing fewer years in re­tire­ment. So by de­lay­ing the pur­chase of a guar­an­teed an­nu­ity, you are able to in­crease the amount you re­ceive monthly.

In­ter­est rates also af­fect the level of an­nu­ity you would re­ceive. If in­ter­est rates are low – as has been the case re­cently – you would be locked into a low-in­ter­est an­nu­ity and miss out on fu­ture in­ter­est rate in­creases.

In a low-in­ter­est rate en­vi­ron­ment, it makes sense to de­lay the pur­chase of an an­nu­ity un­til the in­ter­est rates are higher.

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