5 things you may not know about life annuities
By Segabe Ditodi
Recent research has shown that retirees’ appetite for risk has decreased and that they seek security and comfort, particularly in times of uncertainty. This has translated into a renewed interest by financial advisers and pensioners to explore guaranteed lifetime income solutions, more commonly known as life annuities.
Despite the perception that life annuities are complex retirement products, they present a practical solution to protect against investment market volatility and increased longevity.
Amid the market instability brought on by Covid-19, retirement income specialist Just reported record demand for life annuity solutions from South African pensioners looking to lock in an income for life. Yet following recent engagements with SA’s over 50s regarding retirement in the present economic context, some retirees still have questions when it comes to life annuities.
These are some of those questions.
Pension value growth has been diminished due to volatile investment markets and low economic growth. How can pensioners improve growth prospects in the next few years?
Safeguarding a stable and secure income to cover essential expenses in retirement should be your first priority, regardless of current market conditions. But to improve growth prospects, you may want to consider a with-profit annuity that gives you the ability to participate in the market without the risk of a negative return.
Compared to fixed escalation annuities, new generation with-profit life annuities combine the guarantee of an income with increases linked to the performance of a balanced investment portfolio. This is enhanced by the insurer’s promise that the annuity income will never reduce, regardless of how long a policyholder lives or what happens to investment markets.
You may also wish to consider options that combine the best of a life and a living annuity, namely a blended annuity solution that provides security, coupled with flexibility. A blended annuity gives you the ability to manage your risk appetite accordingly and allows you to decide how much of your living annuity portfolio should be allocated to the guaranteed component over time.
How can I protect against the impact of inflation on my income in retirement?
The pandemic presented exceptional changes that will ultimately affect the future purchasing power of your retirement capital. You and your adviser may consider various types of life annuities to protect your retirement income over the long-term. Fixed escalation life annuities protect against a stable inflation rate. Inflation-linked annuities protect against the inflation rate of the basket of goods that make up the index of inflation. With-profit annuities protect against inflation to the extent that a balanced portfolio generates returns in line with expectations of around 4-5% above inflation.
When considering increasing life expectancy, retirees should consider how their income might grow over a long-term horizon, in line with life expectancy. For example, although a with-profit annuity may have a lower starting income than a fixed escalation annuity, if the with-profit annuity keeps up with inflation successfully, its income growth better protects a retiree’s purchasing power later in life.
How secure are the insurers providing guaranteed income for life?
Insurers are regulated by the Prudential Authority of the Reserve Bank (PA). All insurers are required to comply with solvency standards set by the PA, which are as strict as standards set for insurers operating in Europe. There are 2 levels: a Minimum Solvency Requirement which the PA deems necessary to protect policyholder interests; and then a significantly higher Solvency Capital Requirement, which should allow a life insurer to withstand a 1-in-200 year adverse scenario. Life insurers hold an additional buffer in excess of this for additional security. The PA monitors solvency levels of insurers very carefully and have powers to step in early to protect policyholder interests in the event that they see a concerning deterioration in solvency ratios. This provides a high level of comfort for SA policyholders.
Can a trust own a guaranteed life annuity or must it be in the name of a natural person?
It is possible for a trust to be the policyholder of a guaranteed life annuity. In order to identify and verify the trust as the policyholder, an insurer will require a copy of the Trust Deed and Letters of Authority of the trust. The same identification procedures will be applied to all trustees and named beneficiaries when setting up the policy. If you are considering this option, we would recommend first seeking expert legal and tax advice, in order to ensure that this approach aligns with your financial planning as a whole.
What happens to a guaranteed life annuity if you emigrate?
Should you decide to leave South Africa permanently, you will be unable to withdraw your retirement capital but will continue to receive income payments into your South African bank account which you can then transfer offshore. You may also arrange with your insurer for your retirement income to be paid into a foreign account, if all your domestic accounts are closed after you have emigrated.
Segabe Ditodi is the Executive Head of Legal and Compliance at Just SA