Bridging the divide between income security and flexibility in retirement

As South Africa’s retirement landscape evolves, financial advisers are increasingly called upon to deliver retirement income solutions that balance income certainty with flexibility.

One such innovation – blended annuities – offers a compelling answer to the dual challenge of longevity risk and market volatility. Yet, despite their growing appeal, misconceptions persist.

Understanding the blended annuity structure

A blended annuity is an innovative configuration of two well-established instruments: a life annuity and a living annuity. Within a single wrapper, the client’s capital is allocated between:

• A guaranteed income component, which provides lifelong, inflation-protecting income and an optional income legacy.
• An investment-linked portfolio, which offers growth potential and capital legacy.

The unified structure allows income to be drawn from the entire solution, with fees applied holistically. The secure income from the life annuity can either be reinvested into the portfolio or used to supplement the overall drawdown.

Why blending matters

South African retirees face a unique set of challenges. Many rely heavily on living annuities, drawn by their perceived flexibility and control. However, this often leads to unsustainable drawdown rates, exposing clients to longevity risk. Conversely, life annuities offer income certainty but are often dismissed as inflexible or old-fashioned.

Blended annuities bridge this divide. They allow you to tailor income strategies that:

• Guarantee a baseline income for life, reducing the risk of outliving savings.
• Preserve investment flexibility, enabling participation in market growth.
• Innovative legacy planning can provide income to the surviving spouse while preserving capital in the living annuity.

This dual benefit structure is particularly valuable in a market where retirees are living longer and inflationary pressures are eroding purchasing power.

Debunking common myths

Despite their advantages, blended annuities are often misunderstood. Here are some prevalent myths, and the facts that dispel them:

1. “Blending is too complex”
   While it combines two income sources, blending uses a familiar product structure—a living annuity. With the right guidance, clients can quickly understand and appreciate its benefits.
2. “A living annuity is sufficient on its own”
   Living annuities are flexible but don't guarantee income. If withdrawals exceed safe drawdown rates (about 4-5%), funds may run out. Combining products can ease drawdown pressure, prolonging the annuity and securing lifelong income.
3. “Blending should only be considered later in retirement”
   Adding a life annuity component earlier can improve income stability and lower long-term risk, while delaying may reduce the benefits this structure is designed to deliver.
4. “Blended annuities are the same as hybrid annuities”
   While the terms are sometimes used interchangeably, a blended annuity truly combines both components within one annuity structure, streamlining management and offering tax and administrative benefits through a single income source.

Strategic applications for advisers

The value of a blended annuity lies in its adaptability to individual client profiles. Advisers should consider blending when:

• Clients are concerned about income sustainability: The guaranteed component provides peace of mind, especially for essential expenses.
• Clients have moderate to low risk tolerance: Blending reduces exposure to market volatility and sequencing risk without eliminating growth potential.
• Clients wish to leave a legacy: Life annuities can provide ongoing income for a surviving spouse, while living annuities may offer capital for other beneficiaries, supporting inheritance goals.

Regulatory and behavioural considerations

Blending supports the Treating Customers Fairly (TCF) framework by providing tailored, needs-based options and addressing biases like loss of control through a balance of certainty and flexibility. It also helps manage client outcomes over long retirement periods and clarifies that income security and legacy planning need not be mutually exclusive.

A tool for modern retirement planning

Blended annuities provide advisers with a unique way to balance guaranteed income and investment growth for clients. As South Africa’s retirement landscape changes and uncertainty continues, blended annuity strategies have become a practical necessity.