The first is an insurance-type product called a Guaranteed Annuity and the second is an investment-type product called a Living Annuity. At 10X we offer our clients the latter product – The 10X Living Annuity.
Each of these products meets different needs so you will need to decide which one is best for you. In this, you might consider a host of factors that are specific to you: your health, age and life expectancy, how much you have saved, your desired income, whether you prefer a secure or a flexible income, the needs of a financially dependent spouse, and whether you want to leave money to heirs, to name but a few.
Here’s a quick summary before we dig into the detail:
What’s a Guaranteed Annuity?
A guaranteed annuity secures you a pre-determined income for the rest of your life. There are different types of guaranteed annuities. Some provide an income that increases with inflation, others pay a level income and others may increase over time, subject to market returns.
Generally you have no say over the initial income and no flexibility to change your income as your circumstances change. And once you’ve purchased the product you can’t switch to another annuity or service provider.
Typically with a Guaranteed Annuity your capital dies with you. However, it is possible to buy a “guarantee period” which will pay an income for a certain number of years in the event of your death. But an annuity with a guarantee period will pay a lower retirement income than one without a guaranteed period.
What’s a Living Annuity?
A living annuity allows you to reinvest your retirement savings to provide you with a retirement income, while affording you further investment growth. It offers you the flexibility of changing your retirement income annually (subject to regulatory limits of between 2.5% and 17.5% of your investment balance per year) and the control to switch your investment strategy if you wish. Any remaining capital after your death passes to your heirs.
There are three key things to consider when purchasing a living annuity: the fees you pay, the portfolio you’re invested in, and the income you choose.
Remember that the total deductions coming off your investment is the income you draw and the fees you’re paying. For this reason, you want to keep your fees as low as possible, so that more of your money goes to you, and less to your provider. The higher the fees you’re paying, the less income you can afford to draw down each year.
At 10X we charge less than half the average industry fees, and never more than 1%pa excl. VAT.
The returns on your investment portfolio can either increase your investment value if returns are positive or reduce it if returns are negative. This will impact the income you can safely draw from your fund. Broadly, the portfolio choice is between High Equity (made up of growth assets offering high expected long-term returns but can be volatile in the short to medium term), Low Equity (predominantly defensive investments (cash and bonds) which provide lower long-term returns but are likely to earn more stable returns) and Medium Equity (sits between the two). You may have the option to switch portfolios, but do so with caution as switching can be destructive.
The 10X High Equity portfolio is purpose built for the growth you need, and you can switch to our Medium Equity or Low Equity portfolios at no cost.
You need to choose an income of between 2.5% and 17.5% of your investment balance per year. Remember, you can’t determine a sustainable income in isolation from the fees you’re paying and your anticipated portfolio returns.
The 10X smart calculators and our expert consultants can help you estimate what you could be drawing down based on the above.
Is a Living Annuity the right product for me?
Your major risk with a Living Annuity is that you outlive your savings. The lower your drawn-down rate, the less likely this will happen. You must also be able to deal with the associated investment risk. This can manifest as either a poor long-term investment return, or as intermittent market volatility, forcing you to draw down on your savings during periods of market weakness.
The bottom line: the Living Annuity is most appropriate if you are confident it will secure your lifestyle throughout your retirement, however long that may be. It may also be right for you if passing on any remaining capital to your heirs is important.
Other circumstances that might lead you to choose a Living Annuity:
If you are in poor health, you will probably want your money sooner rather than later. In that case, a Living Annuity with a flexible draw-down rate may suit you more.
Your age is also a factor. For example, if you retire young, a low-cost Living Annuity may serve you better than a Guaranteed Annuity as the latter will factor in your increased life expectancy and pay out less. But in your seventies, the Guaranteed Annuity is likely to pay out more, as your life expectancy has fallen. Fortunately, with a Living Annuity you always have the option to convert the balance (or a part) of your capital into a Guaranteed Annuity at a later stage.
Choosing the appropriate post-retirement product is one of the most important financial decisions you have to make in your life. To compare alternate options, you should ideally consult an appropriate retirement planning tool (such as the 10X Retirement Calculator) and/or a financial advisor or 10X Investment Consultant.