With-profit annuities – a ‘just’ choice for many retirees
At retirement, you have to make a decision on how to invest your retirement savings to address all your financial needs for the remainder of your non-working life. A big risk is that you have not saved enough. An even bigger risk is that you end up with the wrong annuity solution that sees you depleting your assets and running out of money much earlier than planned.
When you plan your retirement budget, you usually separate your needs and your wants. You probably want many things in your retirement. You may want to travel or start a new hobby or spend more time with your grandchildren. But your overriding need is to know you’ll have enough income to at least meet your basic needs and expenses such as food, healthcare and housing for life.
Your needs and wants are quite different, so it is worthwhile to consider which annuity solution works best for each of these. Another way to say this is that you need to use the right tool to address the risk.
To ensure that you have a regular monthly income to meet your essential expenses for life that never decreases, an insurance solution is usually the best approach. This comes in the form of guaranteed life annuities, offered by insurance houses and other specialised financial services companies. Life annuities mitigate the risk of living longer than your retirement nest egg can cover.
Just is a retirement income specialist and entered South Africa in 2015 to help retirees mitigate the risk of running out of money and help them achieve a better later life. Our new-generation annuity solutions are designed to fill important gaps left by traditional providers of life and living annuities in South Africa. Just gives retirees a measure of comfort and safety by providing a guaranteed income for life.
Just Lifetime Income (JuLI) is a type of life annuity known as a with-profit annuity. It is accessible as a standalone life annuity or as a lifetime income portfolio within a blended living annuity.
At Just, we believe that new generation with-profit annuities offer better value for money and higher increase potential over the long term. Analyses show that if a balanced fund provides a return that is 2% above risk-free government bond returns, a with-profit annuity will provide better value for money over the expected lifetime of pensioners, which can be anything from 15 to over 30 years into retirement. This is enhanced by the insurer’s guarantee that the annuity income will never reduce, regardless of how long you live or what happens to investment markets, while uniquely providing the ability to still participate in investment markets without the risk of a negative return.
With-profit annuity increases are driven by the performance of investment portfolios, with 65 to 70% allocated to equities providing higher expected returns over the long term. Many insurers link their with-profit annuity increases to in-house asset managers, whereas Just uses independent asset managers who focus on maximising investment returns. Policyholders have a choice of the underlying investment portfolio from over 10 investment portfolios from some of SA’s top asset managers.
Just Lifetime Income also gives you the ability to provide for loved ones in the form of an income legacy. You have the option to continue paying to your spouse or dependents for a period of up to 20 years.
Is there a good or bad time to buy a with-profit annuity?
New generation with-profit annuity rates change on a daily basis to reflect the current market conditions as well as the market’s view of future interest rates. This means that the value for money you can expect to receive over your future lifetime remains unchanged regardless of the exact date of purchase. We therefore believe that there is no benefit in trying to time the market as the price of the annuity will automatically adjust to reflect the changes in market conditions. It is ideal to cover your basic expenses in retirement with the income from a guaranteed life annuity that at least targets inflation or a percentage of inflation. Allowing an insurer to manage the various risks associated with providing a sustainable lifetime income for life and achieving peace of mind is not always measurable in monetary terms.
Accessing a new generation with-proft annuity after retirement
As it stands, current regulations do not allow you to split your living annuity after retirement. However there are options to consider and discuss withyour financial adviser to improve the sustainability of your retirement income:
- You could convert your entire living annuity to a guaranteed life annuity, especially if you are drawing at a rate higher than the recommended drawdown rates.
- You could transfer your entire living annuity to a blended living annuity to access a lifetime income portfolio.
- If you are already invested in a blended living annuity, you could consider increasing your allocation to the lifetime income portfolio to secure a higher guaranteed income for life.
- You could endure the risks and effectively self-insure against volatile markets and outliving your capital by remaining in a standard living annuity.