ANNUITIES. demystified. Loreta Dienst 30 May 2017

Transcription

1 ANNUITIES demystified Loreta Dienst 30 May 2017

2 DID YOU KNOW? that around 50% of 60 year old males live past 81 and females past 87! Don t under-estimate the importance of your retirement income planning 2

3 ANNUITIES 101 A lump sum is used to purchase an income for the remainder of the annuitant s life Can be joint life the income payments will continue to be made until both the annuitant and the spouse pass away Term certain and thereafter can purchase a guarantee period Income can either be: For life, i.e., a guaranteed annuity with various types of annual increases Investment funded, i.e., a living annuity Each annuity type: Meets different needs Comes with a specific set of risks and benefits 3

4 GUARANTEED (LIFE) ANNUITIES 4

5 GUARANTEED (LIFE) ANNUITIES Constant, predetermined income for as long as you live The risk of outliving your retirement capital (longevity risk) is transferred to the provider Your income is guaranteed, even if markets perform worse than you expect You can choose to either receive an income that remains unchanged for as long as you live, or an income that grows over time Guaranteed (life) annuity type Level Fixed Escalation Inflation-linked Bonus Escalation (with-profit) Annual increases None Predefined (5% for example) Tracking CPI Based on smoothed performance of underlying assets Each of these options has a different starting income level the better the guarantees, the lower the starting income Guaranteed terms, e.g. 5 years, allow payments to be made to beneficiaries in case of early death - but the higher the guaranteed term, the lower the starting income As an individual, you can potentially purchase a death benefit alongside a guaranteed (life) annuity to preserve capital 5

6 LEVEL ANNUITY Real income per level annuity type over time Highest starting income Income payments remain constant No inflation protection Income unaffected by investment markets Real income per month (R) Year A LEVEL GUARANTEED ANNUITY IS SUITABLE IF: You want absolute certainty of an income for as long as you live You want the highest starting income, but are aware that inflation will erode most of this over time You do not want to risk your income reducing due to underperforming investment markets Your spouse or family does not need your remaining retirement capital after your death 6

7 FIXED ESCALATION Income payment increases annually at a predefined rate The higher the escalation rate, the lower the starting income Income unaffected by investment markets A FIXED ESCALATION ANNUITY IS SUITABLE IF: Real income per month (R) Real income per fixed escalation annuity type over time Year Fixed esc. (5%) You want absolute certainty of an income for as long as you live You are prepared to take a lower starting income (compared with a level annuity) in return for annual, predefined increases. These increases may not match inflation You would like some level of inflation protection You do not want to risk your income reducing due to underperforming investment markets Your spouse or family does not need your remaining retirement capital after your death 7

8 INFLATION-LINKED Income increases annually in line with inflation Aims to offer protection against cost of living increases Decreases can be applied in a deflationary environment (unless you purchase a Real income per month (R) Real income per inflation-linked annuity type over time guarantee of no decrease) Year CPI AN INFLATION-LINKED ANNUITY IS SUITABLE IF: You want absolute certainty of an income for as long as you live You want your future increases to keep up with inflation, but you are aware that this offers the lowest starting income Your spouse or family does not need your remaining retirement capital after your death 8

9 BONUS ESCALATION (WITH-PROFIT) Has an investment return ( with-profits ) component Bonuses (increases) granted aim to smooth increases over time The aim of declaring bonuses is generally to ensure a stable, increasing income over time Once declared, bonuses cannot be removed the level of income cannot decrease Increases granted in the same manner as pensioner increases granted on Defined Benefit Funds Real income per month (R) Real income per bonus escalation annuity type over time Year PRI (3%) PRI (4%) PRI (5%) A BONUS ESCALATION ANNUITY IS SUITABLE IF: You want absolute certainty of an income for as long as you live You want a reasonable starting income with future income increases that are linked to investment markets You would like some level of inflation protection You do not want to risk your income reducing due to underperforming investment markets Your spouse or family does not need your remaining retirement capital after your death 9

10 GUARANTEED (LIFE) ANNUITIES COMPARED Real income per annuity type over time Real income per month (R) Year 10 CPI-linked WPA PRI (2%) WPA PRI (3%) WPA PRI (4%) Level Fixed (5%)

11 LIVING ANNUITIES 11

12 LIVING ANNUITIES You decide how much income you want to earn each year. Your annual income is converted to a percentage of your retirement capital and is known as your drawdown rate You are allowed to change this drawdown rate by adjusting income only once a year, limited to a range of between 2.5% and 17.5% per year You gain exposure to investment markets. This means that your capital can grow during positive market conditions, or reduce drastically in negative conditions Although you have flexibility to select your level of income annually, you take on the risk of running out of money, if there is poor market performance and / or if inflation is higher than expected Unlike a Guaranteed (Life) Annuity, you take the risk of living too long Therefore ensure your drawdown rate is sustainable by speaking to a financial advisor regularly 12 On your death, your beneficiaries can choose to either continue with the living annuity or receive a lump sum payout

13 LIVING ANNUITY Market performance will impact your capital investment over time You can adjust your level of income between 2.5% and 17.5% each year based on your income needs A LIVING ANNUITY IS SUITABLE IF: You want to leave a legacy You want investment freedom and market-based performance You are prepared to take the risk of running out of capital due to: Drawing too much income over time Markets not performing to expectations, especially over prolonged periods You living longer than expected 13

14 INCOME SUSTAINABILITY - LIVING ANNUITY EXAMPLE 1 14 Low drawdown selected: 2.5%, but increasing over time because of reducing capital Real level of income sustained for, at least, a 30 year period Capital available on death

15 INCOME SUSTAINABILITY - LIVING ANNUITY EXAMPLE 2 15 Relatively low drawdown selected: 4%, but increasing over time because of reducing capital Real level of income not sustained for a 30 year period Less capital available on death

16 INCOME SUSTAINABILITY - LIVING ANNUITY EXAMPLE 3 Relatively high drawdown selected: 8%, but increasing over time because of reducing capital Real level of income not even sustained for 10 years 16 Little capital available on death

17 SUMMARY 17

18 SUMMARY OF ANNUITY FEATURES Level Fixed Escalation Inflation-linked Income never changes Income guaranteed for life Income increases with predefined % Income changes with CPI (can decrease*) Bonus Escalation (With-profit) Income increases in line with underlying assets No lump sum (need to purchase death benefit at an individual level) Highest starting income for guaranteed (life) annuities Living Annuity Can run out of money Flexible income Lump sum on death * Unless you purchase a guarantee of no decrease 18

19 SUMMARY OF MAIN RISKS 19

20 CONSIDERATIONS WHEN CHOOSING AN ANNUITY PROVIDER Security of promise the financial strength of the provider Annuity types on offer ensuring that you get the annuity type that you need Experience in the market your annuity is well developed and managed Servicing effective after sales engagements 20

21 This presentation is owned by Old Mutual Life Assurance Company (South Africa) Limited ("Old Mutual"). No part of it may be reproduced in any form or by any means without Old Mutual's written permission. Old Mutual has made every effort to ensure the information contained in this presentation is accurate. Old Mutual does not accept responsibility for any loss or damage suffered by a person as a result of reliance on the information contained herein. The presentation may be reproduced for education purposes without the prior written permission of Old Mutual, provided that this presentation and Old Mutual are identified as thesource of such information THANK YOU 21