How to choose retirement products based on your priorities
We list four main types of annuity products and what each one offers
Scientists have successfully reversed ageing in mice and are ready to test their technique on people. Also, the first clinical trial of 3D-printed bionic hands for kids was recently launched in the UK. If we can print “superhero” hands, how long before we can print a whole new set of organs too?
Patrick Sheehy, head of product management at Glacier by Sanlam, says: “Increased longevity has placed more weight on health and fitness concerns. People don’t just want to live longer – they want to live well for longer too. A 65-year-old couple in good health in South Africa today has a 50% chance of at least one partner living to age 94. People’s needs are evolving and retirement products have to change accordingly.
“A lot of focus is placed on product selection during the working years. However, once you stop working, selecting the right product is just as important. This is what will pay out an income to you for the rest of your life, so you need to select one that suits your lifestyle and goals.”
While it’s always best to seek guidance from a financial adviser, here Glacier by Sanlam outlines the four main types of annuity products and what each one offers. The biggest decision to make is whether to be in the market or buy a guaranteed income for the remainder of one’s life – or a combination of the two.
1. A guaranteed life annuity
This secures income certainty for the rest of an individual’s life.
It might be your match if: You believe you or your partner will live for a long time; you’re inclined towards investment stability; you want sufficient income to cover your basic expenses; and you don’t prioritise using your retirement savings to leave a financial legacy for your dependants.
In a nutshell: A guaranteed life annuity will secure you an agreed-upon level of income for the rest of your life – whether you live to age 70 or 105. It can also protect your partner should you die (your partner will continue receiving an income if you’ve selected that option). This option mitigates longevity risk (the risk that you may live longer than expected, which may lead to you running out of funds, and hence income) but doesn’t allow for capital growth. Additionally, income cannot be carried over to beneficiaries. Payments cease after the last partner passes away.
When you speak to a financial adviser: Ask your adviser to look at your non-discretionary (essential) vs discretionary (nice to have) expenses and weigh these up against your total accumulated savings to establish whether you have enough capital to cover these. If your retirement savings are short, you may need a smart investment and income withdrawal strategy, plus a trimmed-down budget.
2. An investment-linked living annuity
This allows for flexible investment and potential capital growth.
It might be your match if: You like the idea of having an investment plan you can personalise with plenty of flexibility; and you’re willing to accept potential fluctuations in your income if it means greater exposure to growth assets.
In a nutshell: A financial adviser is likely to take your accumulated savings, expenses and expected lifestyle into account when guiding you towards this annuity plan – it’s often more appropriate for individuals with a substantial capital amount to invest on retirement. Together with your adviser, you control your underlying investments and the income you withdraw (within regulated limits) to adapt your cash flow to your evolving needs. Additionally, your beneficiaries will receive any available funds after your death.
When you speak to a financial adviser: You need clear guidance to ensure that an aggressive withdrawal strategy and investment underperformance don’t deplete your funds. This is not a plan that necessarily takes longevity risk into account. Discuss your desire to leave a financial legacy – there are alternative ways to do this aside from your annuity plan.
3. Glacier’s Investment-Linked Lifetime Income Plan
This secures an income for life with some investment exposure.
It might be your match if: You think you will live long (a high longevity risk), so you want the security of a guaranteed income, but you also want to be able to invest, with the ability to choose your funds and desired level of risk. As with a guaranteed annuity, leaving a financial legacy for your dependants is not a priority.
In a nutshell: With Glacier’s Investment-Linked Lifetime Income Plan, you and your partner (if this option is selected) will receive a guaranteed number of retirement income units over the course of your lifetime(s). Together with your financial adviser, you decide how the units are invested for the appropriate balance between long-term income growth and short-term volatility.
When you speak to a financial adviser: Discuss your risk appetite and what kind of inflation-beating investments are available that minimise market volatility while ensuring growth in your income.
4. Combining the investment-linked living annuity and Investment-Linked Lifetime Income Plan
It might be your match if: You want the best of both worlds with a secure income and a flexible, inflation-beating investment plan. This way you could combat longevity risk while growing your underlying capital.
In a nutshell: This would mean a combination of an investment-linked lifetime income and a living annuity plan, which allows investors to choose how to invest their capital and the percentage income they’ll take. Ultimately, combining the different retirement income options means you draw on the strengths of each offering and can leave a financial legacy for your dependants.
When you speak to a financial adviser: If a financial adviser believes this combination is right for you, then you’ll also need to work together to decide what percentages to invest in the investment-linked lifetime income plan and the living annuity plan. It may come down to whether you’re more concerned about longevity protection or about capital growth. If you have high longevity risk, then a greater percentage may go towards the investment-linked lifetime income plan, but if growing your capital and leaving a legacy are your main concerns, the living annuity might receive a greater portion.
At a glance – click below to view the table:
It’s important to know your priorities for your golden years so you can work with an adviser to determine the product, or combination of products, that satisfies those needs. For more information on Glacier by Sanlam and its offerings, visit www.glacier.co.za/campaigns/retirement2017.
This article was paid for by Glacier by Sanlam.