Blue Chip Issue 90

FINANCIAL PLANNING | Retirement
BLUE
CHIP
Converting your retirement
assets into an income should
not be done lightly.
die early. When you have a living annuity, you have to invest
as though you are going to live to 100, as you cannot afford
to run out of money.
• Life insurance companies can afford to be a little more
aggressive about how they invest the money, as they have large
pools to invest. As an individual, you cannot afford to take a
chance with your retirement capital, so you need to invest more
conservatively and give up some potential growth.
Downside of life annuities
Life annuities are designed to provide you with a pension for the
rest of your life. Once they are set up, there is very little flexibility.
You lock yourself into a particular income stream and that will be
paid to you for the rest of your life.
The other weakness of the annuity is that it is not designed to
pay an inheritance. With the living annuity, there will often be an
amount that your children can inherit once you and your spouse
have died.
This is not the case with a life annuity, as your children will stand
a much lower chance of inheriting because your pension will have
dried up.
I like to use a life annuity in conjunction with a living annuity.
The life annuity is used to cover your fixed costs such as your utility
bills and medical aid, and the living annuity covers the rest.
In the example below, if you bought a life annuity of
R3-million and used R7-million to make up the balance of your
income, you could significantly reduce your living annuity
drawdown rate:
Living annuity R46 000
Life annuity with no annual increases R96 000
Life annuity with 5% annual increases R70 000
R10-million living annuity would thus give you a sustainable
income of about R46 000 a month.
A life annuity, on the other hand, would pay out a level amount
of R96 500 a month for the rest of your life and your wife’s life. If
you wanted an annuity that increased by 5% a year, the annuity
would start at R70 000 a month.
To summarise, we have:
As you can see, the life annuity will provide a much higher
income for you. There are a few reasons this is the case:
• As life annuities are provided by life insurance companies,
they make use of life expectancy tables. The people who live
beyond the life expectancy level are subsidised by those who
Having a lower drawdown rate can increase the chances of the
capital value of your living annuity increasing over time. Not
only will this give you greater financial security, but you will
also increase the chances of your children inheriting something
once you and your spouse have died.
Converting your retirement assets into an income should
not be done lightly.
I would recommend that you chat with a financial advisor, who
can advise you on the right combination of life and living annuities.
This story first appeared in Daily Maverick.
www.bluechipdigital.co.za
39