Can you maintain a reasonable standard of living in retirement when markets let you down?

Modelling by Momentum Investments shows you can with a hybrid life/living annuity.
Image: Shutterstock

When markets underperform, the notion of protecting your retirement income for an additional decade may seem fanciful, but Momentum Investments has shown that it is possible when you combine the best of life and living annuities.

These were previously available as separate products, and each comes with advantages and drawbacks. The underlying investments within living annuities can include unit trusts, cash investments or share portfolios, and that leaves them vulnerable to market swings. The client assumes all the risk, which makes it vitally important to pace the drawdown in savings to make them last as long as possible.

Life annuities offer a guaranteed payout, with the insurer taking all the risk. A potential disadvantage is that inflation eats into the regular payout – especially on a level income annuity – making it harder to cover basic life expenses.

Momentum decided to reimagine retirement in a way that would combine the best of both products, and the results are quite spectacular.

The primary reason why the combination produces such a powerful outcome is because it protects the investor against the primary retirement risks i.e. market risk and longevity risk.

The impact these risks have on a retiree and how the hybrid annuity can reverse them are explained by the below images.

The existing living annuity risk spiral

How a hybrid annuity can reverse the risk spiral

The attributes of life annuities provide a form of hedging against the effects of the traditional retirement risks.

Martin Riekert, executive head of retail investments at Momentum Investments, says the enthusiastic market response to the launch of the product from both advisors and clients is due to the radical implications it holds for the retirement market. It means retirees can survive longer on available retirement savings by more prudent asset allocations.

“The response from financial advisors and investing clients has been encouraging. We expected a good response from those with smaller investments looking to increase their allocations to the life annuity portion, but what surprised us was the volume of larger investments of R5 million and more who want to dedicate as much as 50% of their investments to the life annuity. There’s also been a very strong uptake among existing Momentum clients looking to adopt this blended approach.

“Retirement has always been a complex issue. In the past advisors had a choice of placing clients into either a life annuity or a living annuity. The emergence of hybrid or blended annuities such as ours means advisors can now give better advice without having to choose one or the other type of annuity. Now they can place clients into a single product, with a single contract. Advisors also have the opportunity to stay engaged with clients on an ongoing basis, even post-retirement, and to make sure that their investments match the clients’ life goals.”

Advisors will also be involved in making asset allocation decisions with clients, based on their risk appetites and tolerances. Advisors are better placed than asset managers to assess clients’ specific goals and needs.

Yet another way for advisors to earn fees will be from advising clients on inheritance issues, as well as ongoing asset allocation decisions during the retirement years.

“With the help of their financial advisor, a person can allocate a portion of their retirement savings from approved retirement funds to a life annuity component within their living annuity. They can personalise their income plan by deciding how much of their retirement savings they want to use to cover their essential life expenses and how much they want to use for their more flexible living expenses,” says Riekert.

By blending the best of both worlds (the income certainty of a life annuity and the investment flexibility of a living annuity), Momentum is partnering with financial advisors to help clients make better decisions about structuring and implementing suitable income solutions when they retire, and to optimally manage their income during retirement to cater for changing income needs.

Hybrid products have existed for a long time, but what makes this a game changer for Momentum is the ability to get the best of life annuities and living annuities in a single contract, rather than having two products running in parallel.

Brought to you by Momentum Investments.

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