Choosing between living annuities and guaranteed annuities for retirement

If you aren’t approaching your 60s anytime soon, retirement might seem like a far-off dream. In reality, the life you see for yourself post-work hinges on the decision you make today. At the heart of this planning lies one big financial question: Should you choose a living annuity or a guaranteed annuity to secure your future income?

Both options have unique strengths and drawbacks that will shape how you manage your retirement savings to create financial stability. It’s also not just a numbers game – it is about understanding your needs, financial goals, and what truly matters as you embrace a new chapter of life.

At least two-thirds of your retirement savings will fuel your annuity decision. It is an investment that determines your lifestyle for decades. Making an informed choice with the help of insights from experts can help you ensure that your golden years are exactly that: golden.

Pros and cons of life annuities

Guaranteed life annuities offer a secure income stream that is usually purchased with a lump sum from an insurance company. The annuity provider (rather than the retiree) undertakes the investment risk, and this means that the beneficiary is guaranteed fixed payments that are unaffected by market fluctuations.

However, there are limitations to life annuities. While you will be guaranteed a lump sum, it won’t grow with inflation – in real terms, the retiree will be going backward. Some may choose to mitigate against this issue by taking the option of adding an inflation benefit to the life annuity.

The problem here arises when the retiree passes away, and the entire capital amount held by the insurance provider goes to them – leaving your loved ones with no benefit. Even adding a spousal benefit has its drawbacks, because the same thing will happen with the capital. There will simply be no legacy benefit for your heirs.

Life annuities can be set up to provide a guaranteed income for a fixed period, such as a decade. Yet, people are living longer into their retirement with the World Economic Forum saying “A 100-year life is now a real possibility for many”. When this guarantee runs out, a capital guarantee can be added, but these add-on products will affect your income during retirement. 

Each additional offering affects your capital because of the cost, which then directly impacts your monthly income.

Pros and cons of living annuities

A living annuity offers flexibility. More and more money-savvy retirees are opting to finance their retirement with one or more living annuities, as the benefits of investing in a living annuity are considerable. In terms of flexibility and degree of control over retirement finances, a living annuity is a great option, as you can choose the underlying assets into which your funds are invested. 

Living annuities can also be managed in terms of expected lifespan. While no one can predict when death will occur, genetics do have some indicators that can assist in planning. Based on this information, it’s possible to map out an investment strategy that sets risk at a certain level.

However, it is always important to balance a basket to get the right risk-reward profile, which is key to ensuring a solid income during retirement, and living annuities offer that flexibility.

Another consideration is whether it may make sense to invest offshore. At any given time, this may offer better returns when viewed with a specific horizon in mind. The key is to plan against the expected lifespan horizon, using the right mix of products. A sound financial plan considers this along with the necessary income at retirement, which will be based on your lifestyle before you put down a pen on your desk for the last time, as well as the status or repayments to be made on assets such as houses. These, however, should already have been paid off.

For a guideline of the income you can expect to receive at your projected retirement age and according to your current savings, you can make use of our helpful living annuity calculator.

Over the long term, even small differences in fees can significantly impact your investment growth. The worst part is that many investors don’t even know what fees they are paying. By minimising fees, you keep more of your money working for you. 

One investment approach that retirees are increasingly employing in order to mitigate market risk is to invest more offshore. Diversifying your portfolio with international investments can help to protect your capital from country-specific risks. Retirement planning, like other investments, requires working with shrewd advice and attention to detail to maximise your finances for the future. 

*Mackay is an investment consultant and group RA manager at 10X Investments.

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