Choosing between a Life Annuity or a Living Annuity? – Part 2
By Patricia Olivier
MD for Corporate Segment, Old Mutual Namibia.
An Annuity is simply defined as a sum of money paid regularly by a financial institution at a certain time in the future, to a person. This can either be for the remainder of their life or a limited number of years, depending on the type of annuity purchased.
Two-thirds of your pension savings must be used to either buy a Life Annuity or a Living Annuity.
The journeys of the Life and Living Annuities are very different – it might therefore be wise to source the services of a Financial Adviser to assist in selecting the correct option or even a combination of a Life and Living Annuity.
Let us take a swift tour through the two journeys to give you a sense of what you can expect from each option:
The Life Annuity journey
When you invest in a Life Annuity, you effectively buy a steady income for the rest of your life. The insurer accepts the investment risks and the responsibility to pay you a fixed income until you pass away. You, however, do not get to choose your monthly income amount – it is calculated according to the amount (two-thirds or more) you have invested with the insurer
The essence of a Life Annuity is therefore a transfer of your pension savings to an insurer of your choice. In return, the insurer provides the security of a fixed monthly income for the remainder of your life
The higher the amount available to invest in an annuity, the higher the monthly income will be and the better you can relax and enjoy your retirement journey without worrying about any market difficulties along the way. You will have time to focus on your hobbies and the things that matter to you, knowing that your Life Annuity is managed by professionals who know what they are doing.
The lower the amount available to invest in an annuity, the smaller your monthly income will be, and you are left to make alternative plans to subsidize your monthly income if that monthly income cannot sustain your current living standards. Options to subsidise could be a delayed retirement, extra work during retirement to earn additional income, and unfortunately, dependence on family members to assist.
When you get to the end of your life journey, you will not have any assets to pass on to heirs. The reason for this is that your investment in a Life Annuity was calculated on your life expectancy and your Life Annuity ensures that you will never encounter any risk of losing your pension.
A Living Annuity journey
A Living Annuity provides a bit more freedom with regards to the choice of the amount you wish to receive as income, on an annual basis, as well as where your pension savings should be invested.
You should use the correct information and knowledge to chart the best investment route and decide how much of the investment to use every year to meet your living expenses.
A Living Annuity gives you the power to adjust your income annually (range between 5-20%) but you need to be careful that you do not draw all your savings early in retirement, while you still need to earn an income for the rest of your retired life-live within your means, draft a budget.
Everybody thinks that they are an expert in their finances. Acting on wrong advice could mean that you face unnecessary risks on your retirement journey. If you lack the expertise to make good financial decisions, ask an expert for help.
With favourable market conditions and an expertly managed portfolio, you could see your investments doing well and growing by more than the amount you are taking as an income every year. A robust Living Annuity with sound investments and advice can aid with a comfortable retirement, but this is not guaranteed, and your investments are still exposed to any market or economic storms – which could place your pension income at risk if you are not careful.
Any poor financial decision that you make increases the risk of you outliving your retirement savings capital and losing your comfortable income. The good news is that having a Living Annuity, means any funds that remain, can be passed onto your heirs, once you reach the end of your life journey.
The choice is up to you.
Saving in a retirement fund while you are working is essential, but it is only the first half of the retirement journey. As you are approaching retirement age, you need to start thinking about how you will spend the second part of your retirement journey and how to invest your pension savings to earn the secure pension you need and deserve.
Next Steps
The next step would be to find a registered Personal Financial Adviser. If not provided automatically, ask the Personal Financial Adviser to provide you with some information about the different retirement options that are available to you. This should include the differentiation between Life annuities and Living annuities as well as sourcing some quotes for the various types of Living Annuities.
From the above it is obvious that the type of annuity you choose is dependent on what you want to do during your retirement, like travelling, buying a new car, or settling in a small coastal town. You, therefore, need to decide what you will do with your retirement savings at least two to three months before your retirement date, to make sure the transition is easy and smooth sailing from day one, like ensuring that all the relevant paperwork is completed and submitted as soon as possible to reduce the likelihood of delays in paying your initial pension.
Enjoy your retirement planning but most of all enjoy retirement!
