A blended living annuity
Just Lifetime Income in a living annuity
One way to better manage the higher risk of a living annuity and the rigidity of a guaranteed life annuity is to use a blended annuity, a product that has the best of both in one.
What is a blended living annuity?
A blended living annuity is a product that allows you to balance a sustainable retirement income for life and discretionary living annuity investments – all in a single product.
Unlike having two separate products, a blended living annuity allows you to structure a suitable portfolio over time, balancing the trade-offs of essential and discretionary spending as they arise.
For example, you could switch additional tranches into the life annuity component when you need to increase the guaranteed income portion as you age.
Blending inside partner living annuities
A blended living annuity offers a guaranteed life annuity (Just Lifetime Income) as an investment portfolio inside a living annuity’s legal structure. Just SA currently provides the lifetime income portfolio in six partner living annuities. Features of both products are available in one solution.
Decrease the risk to your retirement income
Research shows that a combination of a living annuity and a guaranteed life annuity is an optimal solution, compared to either product on its own.
A living annuity is not risk-resistant
A recent study of around 30% of the living annuity market conducted by Just SA, revealed:
- an average drawdown rate of 8.5% per year
- two thirds draw more than the recommended sustainable drawdown rate and risk running out of retirement income
There are three possible scenarios or 'zones' for living annuitants in South Africa.
They are either:
- Drawing an income at a sustainable rate (safe zone)
- Drawing an income that is above the recommended sustainable rate, but below life annuity rates (risky zone)
- Drawing an income at an unsustainable rate, above life annuity rates (danger zone)
Income Sustainability Map Example
According to Deane Moore, this is ironic because half of these living annuity policyholders could guarantee a regular income for life, with annual increases that target inflation, by investing part of their living annuity assets in a life annuity (i.e. those in the ‘Risky Zone’ in the diagram above).
The simple reason that life annuities sustain a higher income for life is that policyholders pool their risk, and those who die earlier cross-subsidise those that live longer.
- The combination improves the sustainability of a living annuity
- You can secure an amount to cover essential expenses and provide a safety net to manage the risks of a living annuity
- It allows for a more aggressive investment strategy to be adopted on the non-JuLI assets
- It allows an optimal balance between income security, flexibility, and capital legacy
Just SA has developed JustBlend, a web-based tool for financial advisers. JustBlend allows registered users to compare blends and can generate a quote immediately.
Projections show the impact of different blend percentages on income and capital over time, which aims to help advisers and clients decide how much to allocate to the JuLI portfolio.
Blending allows annuitants to structure a suitable combination of guaranteed and flexible income over time, balancing the various trade-offs by switching additional tranches into the life annuity component when required. This combination makes a living annuity more sustainable, mitigating the risk of running out of money too early.
Our benchmark blend framework provides a guideline to help you calculate an appropriate amount to be allocated to the life annuity component depending on your client’s needs and circumstances.
- As a registered adviser, you can request a quote for the Just Lifetime Income portion directly in JustBlend. Please contact us to request registration details.
- You may also need to provide:
- Underwriting is optional and can improve the annuity rate. This is a 20-minute phone call to your client, for which we will need a telephone number and a convenient time to call.
*Depending on the partner’s living annuity arrangement