In my previous article, which you can read here if you have not yet done so, I compared a living annuity and a life annuity, narrowing it down to the differences between “investment-linked living annuities” and “compulsory guaranteed annuities” .
It is also crucial to note that no one financial solution will suit all investors, and it is of great importance to seek professional advice when considering these options.To compare these two types of annuities, let’s look at the example of Sue Smith. Sue is 60 years old, single, and retiring. She has a R1 million retirement fund benefit, which she has decided to wholly transfer to an annuity.
Thus, for this scenario, we incorporated an increasing income up to the age of 78, after which no inflationary increase was applied, and the drawdown rate was capped at 17.5% per annum.In this scenario and for the purposes of these calculations, Sue’s income starts at a 6.95% drawdown as a fixed rand amount. This rand amount is increased by 5% every year. Once Sue retires, she will start drawing a gross monthly income of R5 791 .
What we’ve also seen in practice, is that it’s not always necessary to implement an annual income increase. During some annual reviews with clients, it is decided that the current income amount is sufficient. If no increase is taken, it obviously bolsters the long-term growth of the investment.
The upside here of course is that Sue is guaranteed this income for life. The downside comes down to the fact that the income percentage is fixed and not flexible at all, and of course, Sue will forfeit the capital, if no capital protection was included.With these specs, the starting income rate for Sue as a 60-year-old female should be somewhere around 7.35%, depending on the insurer and the pool of lives assured. She will thus earn a gross monthly income starting at R6 125.