Retirees can now buy an annuity that protects them against the risk of outliving or drawing down too much of their retirement savings, while enabling them to choose the underlying investments and earn market-related returns from their investments.
Sanlam, together with its investment platform, Glacier, are offering an investment-linked lifetime income plan.
The plan must be bought through a financial adviser.
The capital you invest in the plan buys you an initial annual income. The annual growth on that income is determined by the performance of the underlying investments you choose.
The income is expressed as a guaranteed number of income units, and is based on your gender and age and the rates that Sanlam offers when you buy the annuity.
For example, if your capital of R3.5 million buys you an annual annuity income of R180 000, you will initially have 180 000 units valued at R1 each. You are guaranteed to receive 180 000 income units every year for the rest of your life.
The income is transferred to a Glacier money market fund and earns interest during the year in which it is paid out.
You must choose the underlying investments from the Glacier investment platform, which includes a wide range of unit trust funds and investments with guarantees. The platform fees are negotiable up to one percent.
At the end of each year, the price of the units will change in line with the performance of the underlying investments you chose.
If your underlying investments have, for example, grown by eight percent after fees, the value of the units will be R1.08, and your annuity will grow to R194 000 in the second year.
In addition, the interest you earned on your income in the first year – for example, R4 500 – will be added to the R194 000, increasing your annual income in the second year to R198 500.
Currently, if you invest in a guaranteed annuity, you buy an income and have no input on the choice of underlying investments. The annual increases in the income are determined upfront and affect the income you will receive in return for your capital. The increases are either level, escalate at a set percentage or escalate in line with inflation.
The income from a guaranteed annuity depends on bond yields, because life assurers use these investments to provide the income, and on your life expectancy, and retirees often find that guaranteed annuities provide a low income. Many turn to the alternative – a living annuity – where you choose the underlying investments and draw down an income from those investments.
The danger of living annuities is that you can run out of capital before you die – there is no guarantee of investment performance or income.
Poor performance as a result of market downturns, high fees and high drawdown rates are all risks to the sustainability of the income you draw.
Glacier’s product attempts to address the problem of your outliving your capital, by guaranteeing you an income for life, but it also enables you to earn market-related returns, rather than a predetermined increase.
You still run the risk of the return being negative if the investments you choose lose, rather than make, money.
Patrick Sheehey, the head of product development at Glacier, says a guaranteed annuity is your best option if you are very cautious and cannot afford a drop in your income.
Many people who buy a living annuity do so in the hope that it provide an inheritance for their children, but the outcome is all too often an income that falls short of their needs, and they are forced to rely on their family.
Glacier’s investment-linked income plan is not an appropriate product if you want to leave capital to your children – like other guaranteed annuities, there is no remaining capital after you die.
Glacier does, as with other guaranteed annuities, give you the option to buy a guarantee on the income. If you die within this period, the annuity will continue to be paid to your heirs. But if you buy a guarantee – that is, the annuity will pay for, say, 10 years, regardless of whether you survive the period, your initial unit value will be lower.
You can also buy an annuity that provides an income for your surviving spouse, also with or without a guarantee period. For example, you can use R3.5 million to buy an annuity that provides you and your spouse with an initial annual income of R180 000 a year and, after you die, provides your spouse with an income equal to 75 percent of that amount, guaranteed for 10 years or until your spouse dies.
If you did not buy the guarantee, the same capital would provide an income of R184 000 a year.
In addition, Glacier offers the option to buy an acceleration of your income – for example, a three percent acceleration. The accelerator will give you a higher initial income but will result in three percentage points being deducted from your portfolio’s returns each year.
For example, if you invest in two unit trust funds and earn an aggregate return of 12 percent, pay one percent in adviser and investment platform fees and three percent for the income accelerator, your return will be eight percent.