Choosing between a life annuity and a living annuity?

Patricia Olivier
Those of you who are nearing retirement age have most probably thought about life after work – and most importantly, how to sustain yourselves when there is no longer a monthly salary coming your way.

An annuity is simply defined as a sum of money paid regularly by a financial institution at a certain time in the future to a person. This can either be for the remainder of their life or for a limited number of years, depending on the type of annuity purchased.

With a life annuity, the payment of a pension is guaranteed for life and paid in monthly instalments to the pensioner.

The life annuity further provides for different possibilities, and an annual pension increase will depend on the type of life annuity purchased by the pensioner.

The initial pension is determined by the insurer based on the age and gender of the pensioner plus all the factors mentioned above, such as: type of increase purchased, guarantee period purchased, single life or joint life. The more options are chosen, the lower the initial monthly pension will be.

Once the pensioner and his spouse (for a joint life annuity) pass away and the guarantee period has ended, the remaining retirement capital remains with the insurer and is used to cover the cost of annuities for those pensioners that are living longer than anticipated.

This annuity option is usually for persons who do not need a big lump-sum payment for a specific purpose, but rather need a stable and predictable income. The decision power is really based on your needs at retirement.

Choices

With a living annuity, there are no pension payment guarantees. There is no insurance contract, but rather a pure investment contract.

The pension savings from the retirement fund are invested with the insurer. The choice of investments used is up to the pensioner. The money is invested in a portfolio chosen by the pensioner. It further provides flexibility to the pensioner in terms of drawdowns – ranging between 5% and 20% of the capital as income each year.

The remaining capital in the investment is available to the beneficiaries of the pensioner once they passes away.

The journeys of the life and living annuities are very different – it might therefore be wise to source the services of a financial adviser to assist in selecting the correct option or even a combination of a life and living annuity.