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