Living Annuity Compared to Guaranteed Annuity
Considering a living annuity compared to guaranteed annuity and which is best for a worker looking to retire in comfort? To answer this question, here are some considerations you need to take into account:
- The period for which you want to get regular income
- Will your funds be a cushion against inflation?
- Will your money be in investment products?
- Flexibility of monthly income earned
- Flexibility to change service providers
- Will dependents inherit guaranteed income?
- Tax implications
Living annuity
A living annuity differs from a guaranteed annuity mainly in the fact that it is an investment product. When signing up for this investment vehicle, you need to think about the amount of fees you’re willing to pay as well as the projected income you want. You should also have a clear idea of where to invest your money to get the best returns. However, bear in mind the returns you will depend on how well the money markets are performing at the time.
In terms of the amount to invest, you have three options: low equity, high equity and medium equity. With high equity you can enjoy a monthly income of R12,200 if the markets are performing averagely and if fees are low. If the markets are poor, a high equity can yield a monthly income of less than R10,000 with low fees. Should the fees be at the industry average and markets poor, you could get as little as R7,600 monthly even with a high equity investment.
Advantages:
- Flexibility to choose income instead of receiving a fixed income. You can choose your income for each year of a living annuity and you also get to choose the type of investment your money is in. This flexibility allows you to adjust your income up or down depending on your needs.
- You can even decide to change service providers midstream to increase your chances of higher returns.
- Whatever capital remains after you pass away is automatically channeled to whichever heir you name.
Disadvantages:
- As with any other investment vehicle, there is a risk that returns can be low. High returns are not guaranteed.
- The income from the investment may not last up to the period the investor envisions in a deflated money market.
- Inflation may eat up the income the investor was to get from the annuity.
- By extension, the money from the annuity may not last to benefit your heirs.
Guaranteed annuity
With a guaranteed annuity you are assured a fixed income until the time of your death. Depending on how much you want to put into the annuity, you can have an option to cater for inflation or a flat income. You can even have increasing income depending on how money markets perform.
Advantages:
- Investor get guaranteed income for the rest of their life
Disadvantages:
- Heirs will not be able to benefit from the annuity as income will cease upon death of the investor.
- No flexibility in terms of income
Before you opt for any of the above, you need to develop a detailed financial plan for your retirement years. If you don’t quite have the financial experience to do so, you can use retirement calculators provided on a number of websites.This will give you a better handle of what options will be beneficial to you.
Next step: To complete your personal financial plan, apply for a personalise life insurance quote by completing and submitting the form on this page
All info was correct at time of publishing