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Is now a good time to buy a fixed annuity?

In addition to the rates currently being offered, it’s advisable to consider whether a life or living annuity will be the best strategy for you.

Is now a good time to buy a fixed annuity? What’s the forecast on annuity rates?

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Dear reader,

I am assuming you may be approaching retirement and need to select a suitable strategy. When using voluntary money to purchase a guaranteed/fixed annuity, you will only be able to purchase a life annuity. At retirement, you will, however, have more options that can be selected. You can select a guaranteed/fixed annuity (also referred to as a life annuity), living annuity – or a combination of both.

To answer your question if it is a good time to buy a fixed annuity, it is important to consider the rates currently offered for annuities, and question whether this will meet your income need for the remainder of your life.

Current voluntary annuity rates, as depicted on Moonstone’s website:

Voluntary annuity
Comparison of monthly annuity income (R100 000 voluntary, five-year term certain)
Gross income Taxable portion Tax-free portion Taxable percentage
Absa* R1 845.75 R179.08 R1 666.67 9.702%
Momentum R1 805.86 R139.19 R1 666.67 7.708%
Metropolitan R1 768.54 R101.87 R1 666.67 5.760%
Old Mutual R1 764.89 R98.22 R1 666.67 5.565%

* As per April 19 2021 rates

With a life annuity, an initial income is selected at the beginning which will pay out for the remainder of your life. The said income can either remain at a similar level or increase yearly if selected at the start.

There are however various reasons why I would rather advise going the route of a living annuity. There will not be a specific rate involved here, but rather an investment philosophy that I expand upon below.

Opting for a life annuity commits your investment for the remainder of your life, and therefore you are “opting out” of being invested in the markets. This contrasts with a living annuity, which operates on market exposure. However, we do understand that an individual’s special circumstances may necessitate making use of a life annuity. That will then need to be determined on an individual basis.

A life annuity does not offer flexibility in cases where you may, for instance, require a higher income or where your beneficiaries are to inherit its remaining funds, or where market returns are promising.

A life annuity, in essence, may limit its own investment return potential in favour of a guaranteed income stream.

A living annuity does however give you the benefit of retaining flexibility, optimising returns, and keeping your options open for the future. Your retirement is likely to spread over a 30- to 40-year term, during which many things can change globally. Making a long-term commitment with so many unknowns in life might create more constraints than benefits.

Benefits of a living annuity:

  • You have the option of choosing an income between 2.5% and 17.5% per annum.
  • You can manage your returns by following a diversified investment approach.
  • Your beneficiaries will inherit the funds on your passing.
  • You can always change to a life annuity or a hybrid annuity should you so wish.

The most important decision you need to make at retirement is the investment strategy you follow. As you will require an income from these funds, finding the perfect balance between safety and market volatility to your monthly income, together with capital growth and an appropriate draw-down rate, is imperative to ensure that these funds will last until you pass away.

At PSG Wealth we follow a diversified approach that includes a balance of asset classes. We also follow a multi-manager approach to ensure you have optimal diversification of an investment approach.

PSG Wealth has applied an investment philosophy that focuses on asset/liability matching (the ‘bucket philosophy’). According to this philosophy, a client’s funds are invested into different buckets based on their investment horizon and income and capital liquidity requirement. The bucket philosophy has formed the cornerstone of our advice to clients and has proven its worth over time.

Do you have any questions you would like answered by registered financial planners?

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COMMENTS   15

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Strange how these financial advisors push living annuities. Their cut of your money is of course bigger. And it lasts longer because they can charge you ‘advisor’ fees for the rest of your life even if you don’t need any advice after retirement. Living annuities have become a feeding trough for advisors.
When you retire get out the Vaseline.

Note how the reader’s question was not answered. As you have said, living annuities have been pushed endlessly, because the advisor’s commission on a client’s living annuity makes up a retirement plan for the financial advisor. As opposed to a life annuity, where the advisor gets a one-off commission payment and no on-going income.

Get out of debt 1st!!!!!! Do not have competing interest rates and competing interest amounts. The market has gone sideways for 10 years so you really didn’t make any money. Inflation gotcha.

Your thoughts on living annuities perhaps Zokey?

If you want to answer the question in the title, you have to consider the impact of current interest rates and mortality on annuity pricing. This article fails to answer the question posed by the author. It also fails to address increasing vs level annuities, which requires thinking about current and future inflation rates. It really is not that difficult.

Huh ? If you think the question is about retirement options, why is the table for a fixed five year term ? If the question is about a voluntary annuity then a living annuity – as you sort of say – is not an alternative.

One nasty little detail. If you have a living annuity you have to convert 100% of the capital amount if want a life annuity.

Life annuity makes sense if you are frail and cannot manage your own affairs. It means you do not need to try and abide by the 4% withdrawal rule. At that stage the annuity will pay much more than the 4% you would consider as income.

No. You can only use part of your fund for a life annuity and the other part for a living annuity. As far as I know?

It can be split into living and life annuity.

You have to split when you use RA to purchase LA.

Never invest your hard-earned money through insurance companies especially Old Mutual.

When u retire from your RA, pensio or provident fund, always try to split them into a few living annuities. When you are really old and hopefully interest rates are higher, then you can convert your many, or some, LAs into garenteed annuities. Keep your options open.

Very good advice, I didn’t ,so can only go the hybrid route or 100 % conversion if I want to access a fixed annuity.

living annuities give flexibility but are risky I think you have to be really proactive, don’t leave this to a once in 6 months coffee with you financial advisor. actually you don’t need a financial advisor you can invest directly with the financial organisation. They will not advise on investment strategy but why waste money on a monthly fee to a financial consultant based in the value of the investment whether you win or lose.
We started with LA but now in later years have split between inflationary linked, with profit and a Living annuity. We arranged it ourselves directly from one company to another, no financial advisor necessary but quite a lot of effort especially done in lockdown. We now have an income for our normal needs and a LA which can be drawn down depending on any other needs or indeed desires, the inheritance for the children may be less, but that’s not really what pension savings is for.

Yes , I like the strategy of funding fixed costs with a life annuity and using the living annuity as the discretionary expense funder.

End of comments.

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