MoneyMarketing asked Mark Lapedus, Divisional Director: Proposition Enablement,
Liberty Innovation, about the annuity options available to retirees.
From data released by ASISA, over 90% of the annuities sold in SA in 2015 were living annuities. Why do you think this is?
Let’s look at the high level differences between a living annuity and a life annuity.
Many people retiring want to leave an inheritance for their loved ones. For this reason they choose to invest in a living annuity as any capital remaining at the time of their death will be paid to their beneficiaries.
This investment has a lot of flexibility, as you can choose how much money to draw out as income and which fund managers should look after your money. The downside of a living annuity is that you are not guaranteed to have money for the rest of your (and your spouse’s) life.
If you choose a life annuity, the life company carries the risk of the investment not performing well and you, as annuitant, living long. At the outset the amount of income you will earn for the rest of your life is known. When you (and your spouse) die, the income stops and there is nothing further to pay. Some pass away younger and others live to be a hundred; investing in a life annuity takes the uncertainty of this away.
Some choose the living annuity to leave an inheritance or for the flexibility, while others need more income to maintain their lifestyle than what a life annuity can pay.
Is the risk larger if one opts for a living annuity as opposed to a guaranteed annuity?
For many people saving for retirement, the reality is that it is something that will happen some day and they don’t start early enough. By the time it does become top of mind, there is not so much time left to save. This means the day retirement dawns, there isn’t enough money in the pot.
For many, a life annuity does not pay enough income at the outset to maintain their lifestyles. In this case, a living annuity presents an opportunity to elect to draw more out of the investment and hope for higher returns. The risk is that the investment returns are too low and the income drawn eats away at the capital. After a few years, the investment value will decline fast and soon there is no more money left.
This sparks fear of losing money as a result of market downturns or just normal market movements. Many then choose to invest to protect the capital by investing in ‘safer’ or low risk portfolios. Even though the risk of losing capital is reduced, the ability to earn a good return is also reduced. The risk here is that the growth on the investment does not keep up with inflation and effectively your money becomes worth less. Inflation eats away at the value of the investment and one cannot immediately see the effect. What this means is that effectively you are poorer each year even if the amount of income has not decreased. In order to maintain a certain lifestyle, the portion taken as income each year needs to increase. The result is that the investment erodes. In a life annuity, there are no investment choices to make; the income is paid to you irrespective of what happens in the market.
Bold, a product released last year by Liberty, has a five-year 80% quarterly high watermark return guarantee. What exactly does this mean for the consumer?
In order to keep up with inflation and be able to draw an income, one should invest for growth. Nothing being free in the world, growth comes with risk. This means that even though one expects to earn a higher return, it may turn out to be a bad year and the returns are low or even negative.
The reality is that not investing for growth is going backwards because of inflation. For many, the thought of a possible loss due to market movements is too scary.
At Liberty, we understand this very well and for this reason we developed the Liberty Bold Guarantee. This guarantee starts off at 80% of your investment value and as your investment grows, the guarantee level also grows. At the end of each quarter, the guarantee will go up
by 80% of the return you received over that quarter. This means that in times where your investment performs well, your guarantee increases, in times where it is not going well, the guarantee will support you. This enables our investors to choose to invest for growth and be protected against severe drops in the market.
Business Development, Laurium Capital