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Life annuity or living annuity: Which is best for your retirement needs?

21 October 2020 FNB
Bheki Mkhize, CEO: Wealth and Investments Solutions at FNB

Bheki Mkhize, CEO: Wealth and Investments Solutions at FNB

Retirement should be an exciting and happy time. But for many people, approaching retirement day can be an intimidating and stressful period mainly because of the many decisions that need to be made.

One of the most important decisions is what to do with your retirement savings to ensure that you receive the income you need after you’ve stopped working. Most of us are required by law to use some or all of that money to purchase an annuity that will pay us that regular monthly income. But with so many annuities on the market, it’s difficult to know which one is right for you.

According to Bheki Mkhize, CEO: Wealth and Investments Solutions at FNB, while there’s no simple answer to this question – since each person’s needs and circumstances are different – there are a few relatively simple questions you should ask yourself before deciding type of annuity is right for you.

“While it’s true that the sheer number of retirement annuity variations can be overwhelming, there are essentially two basic annuity types that underpin most options – living annuities and life (guaranteed) annuities,” Mkhize says, “and the best approach to choosing between these two is to not get bogged down by details and complexities, but rather focus on which best suits your situation and meets your retirement needs.”

He suggests thinking carefully about your response to the following three questions when deciding whether a life or living annuity is right for you:

1. Do I fully understand the key differences between a life and living annuity?

Mkhize says that, at the most basic level, the main difference is that a life annuity guarantees you a monthly income for life but does not give you the opportunity to change the income on an annual basis , while a living annuity lets you choose your income and allows you to change it annually, but gives you no guarantee that your money will last for the rest of your life. The living annuity further allows you flexibility of being able to invest up to 100% in offshore investments. He lists the key differences you should be aware of as follows:

Living annuity

Life annuity

Provides an income linked to the equity market. You choose how much income you draw (see below). Your capital can run out if you draw too much, and then you’ll stop earning an income.

Provides a pre-determined income for life, based on the amount of capital you use to purchase the annuity.

You can manage your annual income by deciding what percentage of the total capital you draw between 2.5% and 17.5%.

Your income is worked out when you buy the annuity, depending on your total capital. It increases yearly by a pre-determined percentage.

If you pass away, the capital still in the annuity can be left to your dependents.

Your capital can’t be left to your dependents if you die. However, you can include a guaranteed pension for your spouse.

 

“If your answer to this question is anything other than a resounding ‘yes!’ the best course of action you can take is to speak to a qualified financial adviser before you make any decision on the type of annuity to purchase at retirement ,” he Mkhize emphasises.

2. Have I saved enough money for my retirement?

“This can also be a fairly difficult question to answer, but most people instinctively know if they have or haven’t got a big enough retirement nest egg stored up,” Mkhize says, “and while it’s by no means a hard and fast rule, if you don’t have enough money saved to be able to draw the income you want for the rest of your life, then a life annuity may be the best option since it guarantees at least some income until you pass away.”

3. Which annuity provider is right for me?

Mkhize says that this is also a difficult question to answer because every person has different needs that may be met by different annuity products. However, he contends that the trustworthiness, security and a track record of the annuity provider are arguably the three most important factors to take into consideration. And when you have a short list of providers that tick all these boxes, the next step is to consider if their annuity offering is simple, understandable, and has been designed with your needs in mind. He cites the new FNB life annuity as an example of such customer-focused design.

“When FNB developed its new life annuity, we started by making sure we have a full understanding of the challenges facing retirees in South Africa today – particularly in a world impacted by Covid-19,” he explains, “and the resulting solution is a retirement solution that will meet the needs of most people who want the security of a guaranteed income for life and the peace of mind that their spouse will still receive an income if they pass away.” This new life annuity adds to the existing FNB living annuity, therefore ensuring client’s needs at retirement are catered for.

“Ultimately, an annuity at retirement that’s right for you depends on your financial situation,” Mkhize concludes, “but by asking yourself these questions, investing enough time to fully understand the options available to you, it is possible to make the right choice and enjoy the financially sound retirement you deserve.”

 

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