A brand new look at retirement means you can bank on your savings lasting longer

Momentum introduces a hybrid between living and life annuities that guarantees a portion of income alongside the chance to grow that income.
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Just five years ago, an estimated 90% of retirement savings went into living annuities, the remaining 10% into life annuities.

Five years later, that split is now 70/30 in favour of living annuities. One of the key reasons for that switch in favour of life annuities – and the guaranteed income these provide – was Covid.

That brought with it a range of potential difficulties, says Martin Riekert, executive head of retail investments at Momentum Investments. “The volatility in the market and the pandemic scared retirees, and prompted many of them to switch out of life to living annuities, but in the process many experienced capital losses which they may never recover from.”

Momentum set out to solve many of the problems associated with both living and life annuities, with its Guaranteed Annuity Portfolio.

“We have reimagined our Retirement Income Option, which is our living annuity, so that clients can enjoy the benefits of a living annuity and those of a life annuity in one seamless solution. It provides clients with the protection of a life annuity to cover their life expenses such as medical aid, food and housing, as well as meeting their need to cater for the more flexible living expenses such as paying for holidays, eating out and other leisure activities,” says Fareeya Adam, head of product solutions at Momentum Investments.

Living annuities are linked to investments such as unit trusts, cash investments or share portfolios, and are therefore subject to the vagaries of the market. When the funds run out, that’s it. The pot is empty. The client takes all the risk. Hence, it is vital to pace the drawdown in savings to make the funds last as long as possible during retirement.

Life annuities are different in that there is a predetermined payout, often monthly, and that payout continues until you die. In this case, the life company takes on the risk of markets falling, or you living longer than expected, which can create dependency where you rely on the support of family members to survive in your older years.

It’s easy to see the problems with each of these. While the living annuity gives you flexibility and broad exposure to the market, that can also work against you when markets decline. The life annuity at least provides a guaranteed payout, but that can become inadequate as inflation eats into your monthly budget.

Momentum now allows clients, with the help of advisors, to allocate a portion of their investment to the Guaranteed Annuity Portfolio, which gives them a guaranteed income going forward as part of a new or existing Retirement Income Option.

At a recent presentation to financial advisors, Riekert displayed a number of charts showing the impact this had on a retiree, aged 65, with R2 million to invest in a living annuity.

Source: Momentum Investments

The example above assumes the client requires an income drawdown of 7%, or R140 000, a year. Under the conventional living annuity, the retiree is able to receive this income until age 83, after which the income starts declining. By age 92, the income is insufficient to cover basic life expenses, which include groceries and medical bills.

Source: Momentum Investments

When the guaranteed annuity portfolio is added to the product, as shown in the chart above, the income only starts to reduce at age 94, and even then the income never drops below what is needed for basic life expenses.

Adam says thousands of scenarios were tested, covering every conceivable market event, to arrive at the outcomes achieved in the Guaranteed Annuity Portfolio.

“The reality is that most people have not saved enough for retirement. This new approach increases the likelihood of a successful retirement,” says Riekert.

Adam says another key benefit of the new guaranteed annuity portfolio is that advisors are able to tailor far more viable and successful retirement options for their clients, with the ability to diversify the underlying investments. “If you want to take on greater risk in the expectation of growing your savings, and so make them last longer, you now have the option to choose a high equity strategy and still enjoy the benefit of a guaranteed annuity,” she says.

The Guaranteed Annuity Portfolio is available for both new and existing Momentum clients. For advisors, the options to earn ongoing fees also increase, as they will play a crucial role in guiding their clients through this new terrain, where Momentum has blended the best of both living and life annuities to give guaranteed income with the potential to earn considerable upside.

“Perhaps most importantly, this product is easy to use and understand, and we’ve designed it so the administrative impact of including it in existing retirement income options is minimal,” says Adam.

Brought to you by Momentum Investments.

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