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Living Annuities

08 March 2017

For many years, the Insurance industry marketed one sort of Annuity option.

This was based on the premise that on retirement, the individual surrendered his retirement capital to the Insurance company who would then set up a compulsory purchase annuity, which could incorporate certain guarantees and payment variations.

These variations would include:

  1. No guarantee
  2. A guarantee to pay for a number of years and life thereafter.
  3. Joint and last survivor option to ensure that the widow continued to receive an income on the death of the first annuitant.
  4. The inclusion of an annual escalation of the annuity to help protect against cost of living increases.

Inevitably and depending on the option, the level of income would vary. Thus, a 10 year guarantee and life thereafter plus a 5% annual escalation plus a joint and last survivor option would reduce the available monthly income from, say, a single life nil guarantee annuity with no escalation.

The other possible disadvantage of this type of compulsory annuity was the fact that once the annuitant died or the surviving spouse died and if this happened sooner rather than later, then the annuity would die with the annuitant, whether there was capital left in the original purchase price.

However, in return for these limitations, the original income from the annuity would be guaranteed throughout the lifetime of the annuitant irrespective of market conditions. This was and still is a distinct advantage.

A Living Annuity on the other hand contains none of these restrictions regarding a fixed annuity.

Instead it is based on whatever percentage is selected by the annuitant as the income from the purchase price. This can vary from as little as 2.5% of the purchase price right up to 17.5%.

The Purchase Price remains in the annuitant’s name and on his or her death, will pass to a surviving spouse or to surviving children, grand-children and even great grand-children – just as long as there is capital left from the original Purchase Price to sustain an income.

But herein lies the caveat – a Living Annuity has to be carefully managed to ensure that the percentage income drawn does not exceed the percentage annual growth of the Capital.

Should this happen, then the Capital will start to erode, eventually leading to no Capital being available to sustain any income.

It is for this reason that any decision to opt for a Living Annuity as part of a retirement plan requires that a competent and qualified Financial Planner review the income and the annual growth to ensure that this scenario never occurs.

Living Annuities have become the preferred funding method for retirement income in recent years and this would be my first choice – provided that I can rely on my Financial Planner to advise me as to the optimum income to fall within the underlying performance of the capital fund.

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