Case studies: how a guaranteed income can improve your lot

You may think you will not earn the best return from a guaranteed annuity, but this is the wrong way of thinking about your income in retirement.

You need to be concerned about the returns you earn when you are saving for retirement, but in retirement you need to consider the best way to convert your savings into the income you need to live on, and, if you can afford it, the bequest you will leave your heirs.

Guaranteeing part of your income may allow you to invest the balance of your retirement savings more aggressively, improving your income and the potential to leave a legacy to your heirs, John Anderson, a portfolio manager at Sygnia, says.

Sygnia is launching a ForLife living annuity in which you can invest in a unitised LifeTime Income Fund, which provides an income for life in the same way that a guaranteed annuity bought from a life assurer does.

The company tested its LifeTime Income Fund in the real-life case of a 75-year-old who has been retired for 10 years and has R2.5 million in a living annuity in a moderate-growth portfolio, from which he draws an annual income of R312 000. A man aged 75 can expect to live for 12 years, and in this case his investment will, in all likelihood, not sustain the income of R312 000 a year for that period.

Your investment in a living annuity is subject to the performance of the investment markets, which may not deliver the returns you need and may not deliver them each year in the order you need, to ensure your living annuity grows sufficiently while you withdraw an income. This risk is known as the sequencing of returns.

By law, your withdrawals from a living annuity must be between 2.5 percent and 17.5 percent of the amount invested. The limit of 17.5 percent means you cannot deplete all the capital in your annuity; instead, your income will decline each year once you reach the maximum withdrawal rate of 17.5 percent, while your capital is likely to erode, unless you earn very high returns.

Sygnia calculated that the 75-yearold’s family would probably have to contribute R300 000 to supplement his income if he lived for 12 years.

But, if he transferred some of his living annuity investments into the LifeTime Income Fund, the man could maintain his income of R312 000 – partly from the guaranteed annuity and partly from the balance – and it is likely that the remaining investments would be sufficient for him to leave a small legacy of R62 500.

In addition, if he lived beyond the age of 87, he would still receive the guaranteed income.

In another case, a 60-year-old with R3.5 million to invest planned to withdraw only 2.5 percent of her capital – an annual pension of R87 500.

By converting part of her investment to a guaranteed income, she was able to increase her income by 60 percent to R140 000 and make her pension more secure, even if she lived longer than expected.

You have to invest a minimum of R200 000 in a Sygnia ForLife living annuity and R20 000 in the Lifetime Income Fund.