Unit trust income specialist Marriott offers an investment-linked living annuity (Illa) aimed at ensuring you do not run out of cash before you die.
It is called the Perpetual Annuity. A pensioner purchasing the product with the minimum of two-thirds of a tax-incentivised retirement savings product or fund is limited to a choice of three Marriott unit trust funds, which aim at producing long-term income and capital growth.
The annuity is only available directly from Marriott. This saves pensioners the linked investment service provider fees normally charged for Illas.
The three available Marriott funds are:
- The High Income Fund , which invests in property, cash and bonds.
- The Prudential Income Fund, which is a balanced fund invested in all asset classes, with some offshore exposure and meets the restrictions of the prudential investment requirements placed on retirement funds by the Financial Services Board.
- The Worldwide Fund, which is a flexible offshore fund able to invest in all asset classes without any prudential restriction.
Reliable income
Heather Mostert, the head of marketing at Marriott, says the three funds can provide pensioners with a consistent and reliable monthly income and offer the investor some certainty in consistently matching monthly income to the monthly income produced by the underlying investments.
Each fund has a different income and growth-in-income objective - the trade-off being the higher the income required, the lower the anticipated growth in income.
She says the focus on income with the Marriott Illa contrasts starkly with conventional Illas, where the investments are invariably managed with a capital growth objective.
Conventional living annuities sell units to fund the pensioner's income.
With the Marriott Illa, unless expressly required by a pensioner who knowingly decides to erode capital, units are not sold to fund the annuitant's income.
The Marriott Illa pension is funded from the income produced by the underlying unit trust funds.
Well positioned
Mostert points out that the argument that investment growth will offset the pension withdrawals can succeed while market values increase, and the erosion of the capital base (number of units) is masked by increasing market values.
But when markets decline, the value of the investment can decrease sharply due to the twin effects of an eroded capital base with the decreasing unit values and the drawdowns.
She says the three Marriott unit trusts have been well positioned, and Illa pensioners have not had to reduce their pensions as a result of the current market meltdown.
Marriott Illa pensioners, by matching their drawdowns through the selection of the proportion of their capital in the underlying unit trust funds, can decide how much money they want to draw as a pension and how much to grow their capital.
The costs for the Illa are 0.5 percent a year and the underlying costs for the unit trust funds are between 0.75 and 1.5 percent a year. Adviser commissions are a negotiable upfront maximum 1.5 percent and the annual fee is a maximum of one percent.
Mostert says the principle to which Marriott subscribes is simple: "Spend only the income produced by the investment, not the capital."