New ideas come from humans’ endless pursuit of survival and life improvement. Faster, earlier, better, safer and cheaper are all words we want to hear when we talk about retirement. In essence, new ideas improve benefits and reduce limitations. When planning for your retirement, you want new ideas to construct an optimum retirement solution, which can provide you and your family with a care-free retirement.
Air travel today is one of the safest ways to travel the world (e.g. safety record vs the distances travelled by humans). But it has not always been this way. It took a very long time for flying to be regarded as safe for the transportation of people and it took continuous improvement and increased regulation, based on past disastrous experiences.
The same is true for inventions in the retirement industry. Retiring (like flying) without the necessary research, prior learning and regulatory precautions, results in a high likelihood of a crash. This crash will inevitably destroy dreams, lives and family structures. When retirement planning is done correctly, it could however simulate a Boeing flying high above turbulent weather conditions, generating massive time benefits together with a magical experience at acceptable levels of risk to her passengers.
The modern day financial advised solutions are more transparent, appropriate to individual investment objectives, with the necessary flexibility. The same is true with air travel; the speed, height and direction of these investment solutions can be changed, making it a much better suited offering to the investor. One can take-off, land and refuel, together with improved regulation and safety measures, on board these new retirement vehicles. It has, however taken years of constant improvement, aspiring to land retirees safely at their next destination, in this case, retirement.
Living annuities versus guaranteed living annuities
In a free market, capital flows to more cost effective, flexible and appropriate product offerings. Investors are more informed now than ever before and ±90% of South African retirees choose living annuities as a retirement vehicle.
Why living annuities are winning the race at attracting capital (so far):
- Trust levels are generally low towards traditional insurers, for many reasons;
- Flexibility – portfolio construction and drawdown percentages are managed by the investor;
- Unattractive guaranteed income offering at point of retirement (due to low interest rates) making retirement unaffordable to many;
- General over expectation of market returns (drawdown rate) and under estimation of market risk (sequence risk)/longevity risk by investors;
- Bequest option for remaining capital at death.
Risks to acknowledge
- Many living annuity investors do not include sufficient growth assets in their portfolio construction, to support their income drawings;
- Many living annuities have a too high starting income drawdown at point of retirement;
- Income drawdown escalation is rarely lower than inflation even in down markets;
- Living annuities that are leaving capital for beneficiaries are by far in minority considering longevity.
Can hybrid living annuities fly?
What has recently hit the market, is a unique combination of a living and guaranteed life annuity in a one product solution. The guaranteed annuity comes in the form of a with profit annuity (WPA). This means that retirement clients are partly insured (against longevity/market risk) and are partly self-insured.
A WPA is a conventional guaranteed life annuity with an annual income increase resting on the investment returns from the underlying investment portfolio. We now see offers which allows investors to self-construct their own independent investment portfolio. The performance of this self-chosen portfolio will determine the annual annuity income increase.
Benefits of next generation hybrid living annuities
- Hybrid living annuities now host both a living annuity and guaranteed life annuity in your chosen configuration (e.g. 70% living annuity and 30% guaranteed annuity);
- Provides a transparent and comparable fee structure (to living annuity);
- The future annuity income escalations (from your guaranteed annuity portion), rest on your own portfolio construction and return results. This results in flexibility, potential higher investment returns and therefore a higher annuity income escalation per annum;
- Hybrid living annuities now provide partial conversion option from your existing living annuity (e.g. convert 10%/20%/30% of your living annuity capital at any given time);
- Medical underwriting is now available on some guaranteed life annuities. That medical condition that has always costed you an arm and a leg, could now result in a higher monthly annuity income payment, from your insurer;
- The remaining investment capital in your living annuity can still be bequeathed to beneficiaries.
The hybrid living annuities does provide an additional set of tools, to improve advised retirement outcomes for retirees.
Many traditional living annuity investors are going to run out of money. This represents a “running out of fuel” scenario during mid-air.
Hybrid living annuities might be the optimal balance between self-insuring and being insured for your retirement.
As with all investment options and to set up a financial plan suited to individual needs, it is best to consult a qualified, experienced advisor.