‘Be wary’ of research showing positives of living annuities

Research showing that retirees have been worse off using guaranteed, or life, annuities, rather than living annuities to provide a pension should be treated with care, both the researcher and one of the authors of opposing research say.

Jeannie de Villiers-Strijdom, the director of the Postgraduate Diploma in Financial Planning at the University of Stellenbosch, says you must be cautious about how you interpret her findings, which have been dismissed as “flawed” by actuary Johan Swanepoel, a coauthor of research done three years ago, which highlighted the risks of using a living annuity to provide a pension.

Swanepoel and Mayur Lodhia’s research, presented to the Actuarial Society in 2012, highlighted how a poor understanding of the risks of living annuities contributed to a high uptake of these annuities.

In her research, presented at the Financial Planning Institute’s recent annual conference, De Villiers-Strijdom compared the total benefits paid by 47 different annuity strategies over 30-year periods since 1960 until 2010.

De Villiers-Strijdom calculated the monthly pensions paid based on R1 million invested in each strategy and determined which one provided the highest financial benefits when all the pension payments were converted to comparable values at retirement.

Covering a period including market and inflation highs and lows, the research not only shows that retirees were worst off in terms of the final values of the pensions received from guaranteed annuities, but that a living annuity performed better than:

A retirement strategy in which you first invest in a living annuity and after 10 years switch to a guaranteed annuity; or

A strategy in which you invest some of your savings in a guaranteed annuity and some in a living annuity.

De Villiers-Strijdom’s research contradicts that done by Lodhia and Swanepoel. The actuaries evaluated the ability of a living annuity to provide a minimum income for life and compared this with the income provided by a guaranteed annuity.

Lodhia and Swanepoel found that, while a living annuity may preserve your capital for your heirs if