The future of retirement income is not a single product – either guaranteed or living annuities – but a combination, according to Glacier by Sanlam.
Investment-linked living annuities (ILLAs) are the preferred choice of retirees as they can choose their income level, control their exposure to risk and nominate beneficiaries to inherit the proceeds.
But on average, retirees need to draw 1% to 2% more income than the guideline recommendations from their living annuities, putting them at some risk if they live to an old age, which could result in them not having enough to live on and leaving little, nothing – or even debt – to beneficiaries.
Rocco Carr, business development manager at Glacier by Sanlam, says Glacier believes that “retirement solutions will in future be a combination of products in which short-term capital preservation for inheritance (should both spouses pass away early in retirement) can be balanced with longer-term income protection against longevity, or the risk of outliving one’s money.”
The challenge isn’t the client with enough money, who needs an income of less than 4% of their capital, but the average client who needs to draw more. A solution is to combine living annuities and life annuities.
Carr says many people made the decision to go into living annuities at a time when guaranteed products gave a guaranteed return of around 5%, while living annuities were getting significantly higher returns.
“But things have changed, and we are looking at guarantees from a different perspective. In balanced funds, many living annuity investments are only getting 4% to 6% while guaranteed rates have picked up and are available with an inflation adjustment as well.
“We noticed some years ago that with people living longer, capital preservation is not a given anymore, and we developed a product to try and address this.”
In the past, a lump sum of R5 million, for example, could be split into two products, say R2 million and R3 million, with one of the two (due to legislation) needing to give at least R150 000 income per annum – making it unviable to split the lump sum.
Now, with changes to regulations, a lump sum can be easily split into three or four possible products, ensuring retirees get the best of both worlds.
“Our view was that instead of buying a single living annuity, a client should buy more than one living annuity, and if need be, at some stage in the future, the client can switch one of them to a life annuity. The client should split the R5 million – and, as an example, buy a guaranteed annuity with R2 million and a living annuity with R3 million – to collectively get a better outcome.”
Carr says many people shy away from life annuities because they don’t accommodate inheritances to beneficiaries. “Our opinion is that retirement money is for retirement, not inheritance, which is a bonus.”
Living annuities allow for income fluctuation, and a few years into retirement, clients can buy a guaranteed product at a better rate than they could earlier.
“There is no specific solution for all clients. We use all the possible tools available and build solutions for each client’s individual needs. By combining and splitting we are more able to project the outcome and manage clients’ expectations while protecting them against the continued income requirements associated with living longer.
“Living annuities offer good opportunities, but they are not the only opportunity,” he adds.
Combining products can ensure that retirees’ month-to-month income requirement is catered for, sustainably. According to Glacier by Sanlam, to guarantee as much of the month-to-month income as possible should be the main priority of every investor and financial planner.
Brought to you by Glacier by Sanlam.