We often get asked which annuity is better at retirement – a living annuity (LA) or a guaranteed annuity (GA)? We’ve asked the 10X team for advice.
“In choosing between the different types of annuities, you must consider a host of factors specific to you,” advises Catherine Neill, Marketing Manager at 10X. Your health, age, gender (on average, women have a higher life expectancy than men), life expectancy, the amount you’ve saved and the desired income you’d like to earn to maintain a certain lifestyle are important factors to keep in mind. However, they’re not the only ones. Neill also highlighted your need for investment and income flexibility, the needs of a financially dependent spouse, potential bequests and relative investment costs. Interest rates also play a part, as your monthly pension is likely to be higher when the prevailing interest rates are higher, as well as the inflation and investment outlook.
Age is really a number
Neill provided the following examples:
If you retire young, a low-cost living annuity may be a better option than a guaranteed annuity. A guaranteed annuity will factor in your increased life expectancy and pay out less.
If you retire in your seventies, the guaranteed annuity is likely to pay out more, as your life expectancy has fallen.
If you are in poor health or terminally ill, chances are you will need your money sooner rather than later. Therefore a living annuity with a flexible drawdown rate may be more suitable, and it also ensures that your capital can be passed on to your heirs.
When you consider these factors, it’s also important to keep the intrinsic nature of each annuity in mind: guaranteed annuities provide security, whereas living annuities are more flexible with growth potential.
LA / GA or LA + GA?
You can do both. You don’t have to invest all your pension savings in one annuity.
A One Lapper recently posed a question regarding the conditions and limitations that should be taken into account when opting for both a guaranteed and living annuity.
10X Investment consultant, Andre Tuck, provided the following answer: “When your source of retirement savings is a pension fund, for example, it must be transferred to one or the other, for example a living annuity. At a later stage when you retire from an RA, for example, you can transfer to a guaranteed annuity, if interest rates are much higher.”
However, the golden rule here is that you can always transfer from living annuity to a guaranteed annuity, but not from a guaranteed annuity to a living annuity.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.