You can get a better guaranteed pension today than before the crash

This presents retirees and some investors in living annuities with a window of opportunity amidst the current crisis.
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Amidst one of the fastest market crashes in the last century, there has been one investment that has gone unnoticed. Guaranteed annuities, also known as life annuities. Today you can get a guaranteed annuity that is 20% higher than before the Covid-19 market crash. This can be attributed to the spike in South African bond yields from 9.5% to above 11%. This presents retirees and some investors in living annuities with a window of opportunity amidst the current crisis.

Retirees invested in a pension fund or retirement annuity fund must buy a pension with two thirds of their fund value. Currently investors in provident funds do not have to buy an annuity. As part of retirement fund reform, National Treasury proposed the annuitisation of provident funds, whereby members will be required, upon retirement, to also purchase an annuity with two thirds of their fund value from March 1, 2021.

Advantages and disadvantages of a living annuity:

Advantages Disadvantages
You can select an income of between 2.5% and 17.5%. If you draw too much income, you face the risk of capital and income reducing over time.
Assets can be invested into a range of investments aligned to your risk profile. You are not bound by Regulation 28, thus you can allocate a higher percentage of assets to offshore investments. You are exposed to market risk; your income and capital is dependent on market movement
You benefit from good investment performance. You are impacted by poor investment performance.
You can nominate a beneficiary who will inherit the balance of our assets. You may live longer than expected, ending up with too little money to last until your death.
A living annuity can be converted to another; living annuity, hybrid annuity or a life annuity.

If you invest in a life annuity, you can select from a range of annuity options and permutations including; level annuities, fixed escalation annuities (i.e. 5%), inflation-linked annuities and with-profit annuities.

The details of each of these permutations is beyond the scope of this article. It is however important for investors to ensure they understand the differences between these permutations i.e. the starting income from a level annuity can look very attractive, however as this does not grow with inflation, investors are left destitute in time as the value of their pension is eroded by inflation. It is sad, and shocking, that these annuities are proposed to investors, without a proper explanation.

Advantages and disadvantages of a life annuity include the following:

Advantages Disadvantages
Your pension is guaranteed for life and is not dependent on market conditions or movements.   You do not have to concern yourself with market movement or investment decisions. Life annuities have no flexibility, once selected you cannot make any changes.
Annual increases are guaranteed for life. Increases are as per your selected annuity option i.e. at a fixed rate off i.e. 5%, at inflation or aligned to market growth (with profit annuities). There is no flexibility in changing your income, once the income and type of annuity is selected it can not be changed.
A spouse’s income and or a guaranteed period can be added. The guaranteed period can make provision for children should both spouses pass away. Upon death, there is no capital left for beneficiaries.

What income can I currently expect from a living annuity and a guaranteed life annuity?

The table below gives an indication of what income can be obtained by investing R1 million in a living annuity or a life annuity. It is important to remember that life annuity rates change weekly and currently the life annuity rates are benefitting from the exceptionally high bond yields. In the example below the Just annuity includes a 75% spouses’ annuity and the Old Mutual and Momentum annuities include 100% spouses’ annuity. Once you have established your specific need it is important to do a like for lie comparison of life annuities. The below provides an indication of the income that is available from different insurers compared to a living annuity from any one of the large financial institutions.

The living annuity drawdown rates used are as per the draft guideline from Asisa (Association of Savings and Investment). These draft guidelines have been developed to provide an indication of what income can be drawn to ensure the sustainability or longevity of a living annuity. With-profit annuities have proven to provide a higher level of income over time compared to an inflation linked annuity. The risk with-profit annuities pose is that there could be a year of low or “0” increases in income, this is specifically relevant in times of uncertainty, as we are currently experiencing. This risk can be mitigated by using a life annuity in combination with a living annuity through what is called a hybrid-annuity, or alternatively through the provision of an emergency fund.

Amidst the current crisis, investors can benefit from high bond yields, resulting in higher life annuities.  By investing in a hybrid annuity, investors can benefit from the flexibility offered by a living annuity and the exceptional value, or higher income, available in life annuities.

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An advert for Just Retirement? But it is good. How about you compare 10X and all the others as well? Like in ALL of them?

10X’s low fees are eclipsed by their especially low fund performance !!!

Good to know that Casper. All these sharks are after our pension money. But getting the real fees out of them is very difficult. If one don’t know what questions to ask they don’t tell you the real fees and other costs.

Can you please name some managed Balanced Funds that have done much better?

Indeed you get what you pay for. @supersunbird check out Ninety One Managed Fund at least a 17% performance differential in the last year.

Not sure that is a fair statement – all asset managers have not done well the last years. And, especially in such an environment, lower fees help a lot.

TrIed 10X.They do not offer Life Annuities.

I appreciate that, living in SA, we must buy in ZAR but I have long said that quoting returns in ZAR is somewhat meaningless. Now more than ever, returns in USD, maybe Euros are much more relevant.

I monitor this all the time. The family investments reached a high in Feb 2018. In ZAR we are down 5% and USD we are down 30% at the moment.

If we can get back to where we started in USD I will be very happy. Expect this to take 1-2 years assuming 50% offshore allocation.

You didn’t mention one very important factor when making the decision on which way to go.
The broker gets a once off commission on a guaranteed annuity.
On a living annuity he also gets an on-going trail fee.
Is it any surprise that guaranteed annuities are not popular ?

That is not the reason. If you bypass the broker/advisor and go direct to the insurer you can get away with no commission on a guaranteed annuity. The type of article above gives the most important pros and cons of Living versus Guaranteed Annuities for one to make the decision without involving, and paying for, a financial advisor

Nothing guaranteed!

Your government is bankrupt and money is being printed already.

So you’ll may not get your annuity and if you do, it will be in a worthless depreciating currency.

An extremely useful well written article:
Other than returns I think 90% of people go the Living annuity route with the “hope” of leaving their Children an inheritance . Hence they “risk” a Living annuity .
The only certain winner with a living annuity are the Coy,s who administer it : They take there commission whilst gambling with your money , take a bonus if it performs well and use their Economist to explain why it collapsed when it does.
One certain Winner. A 50/50 Mix of Guaranteed and Living Annuity probably makes sense.

Showing my age, but with a guaranteed annuity, you should also take out life cover for the purchase amount.
There is no underwriting. The income stops on death, and the life policy pays out to the beneficiaries.

I am looking after the living annuity that my sister has. Alexander Forbes has a fantastic tool that calculates the Life Annuity available taking into account all the input factors. Every year I calculate the option of a life annuity which always gives her more than current draw down on the living annuity. Every year she chooses to stay on the Living Annuity. In these days where our children face a difficult future, the ability to leave something to them is a strong incentive.

Makes sense. But this implies you have enough funds to afford this route. If the % income advantage of a guaranteed vs living is important for your day to day survival then the guaranteed route is more realistic, especially where your income is guaranteed to increase with CPI and you don’t need to worry about investment strategy, drawdowns and broker performance.

How does one get hold of the calculator tool?

The broker gets an initial commission on a guaranteed annuity.
On a living annuity he also gets an on-going trail fee.
Why do you think guaranteed annuities are not popular ?

Guaranteed Annuities is the way to go – Just Do It

I think Fund/Asset managers have become ”screen watching junkies” and they will gamble with your Living Annuities as long as the market allows them to do it – why? because somebody else (you the pensioner) is carrying the risk..

Just compare the performance (all your highly ”educated” fund managers investment decisions etc) of the living annuities in three periods (last 15 years, last 10 years, last 5 years), with Guaranteed annuities – there just are any choice despite all the jargon that the fund managers put out!

It’s about time that the relevant Regulator has a look at the risk that pensioners are ”forced to carry”, which in my mind (as an ex-employee trustee”, is totally against the law due to the volatility and quality of researchers that bought and fell in love with their Steinhoffs and Sasols etc.

“… it is important to do a like for lie comparison of life annuities.”

I like that … doing a lie comparison on all investment advice.

Many people will believe the numbers mentioned above:
BUT let’s see (use Just Retirement’s example)

Living annuity: – R1000000 x 4.5% = R3750.00 per month. Nowhere was it mentioned that is was gross and not net income. Therefore the assumption will be that it is net income. So there is ZERO upfront / management fee’s???

Life annuity: R6106.00 per month. I presume no upfront / management fees are in the example???
Years ago my wife got a quote from Sanlam for about R200000. If I remember correct, if she chooses a fixed option with no strings attached she would receive about R2000, when longest life of the spouse and or guaranteed for 10 years options are added it fell to about R1500, but when a yearly income escalation of 5% (7.5%?) was added her starting income fell to about R950. So 16 years later she would receive R2000, (what the figures are today I do not know).

Incidently, on what yield was the R6106 calculated? In the example in the article: R1000000 x 7.3% = R6106 per month. In the article it said that bond yields (now) is 9.5% That’s a difference of 2.2%
Is this perhaps the fees? Please inform me.

So this means your capital invested at the inception is at risk. Terrible investment for any person contemplating income after work life. Reminds me of the 10 year plans years ago where many investors lost heavily on initial funds invested.

End of comments.





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