The decisions regarding income at retirement can be a seriously frightening experience if you have not properly planned for it. Even if you are well planned though, a critical decision regarding how your income will be paid to you from your retirement savings may still present as a real conundrum.

This, is the decision between a living annuity and a life annuity. A living annuity is an active investment which draws down a defined amount each year and pays an income to the retiree. A life annuity is when a retiree uses their capital to purchase income from an insurer at the prevailing annuity rate for the rest of their lives. Each have their own benefits and would need to be unpacked along with each retiree’s specific needs but below are some of the common issues with each.

Common issues with a Living Annuity(Active Investment Type Income)

As the underlying assets of living annuities are invested in the market, it is subject to the ebbs and flows of the market as well. Should there be unforeseen erratic movements in the market, the impact on the investment could place unwanted fluctuation on the income expected by the retiree. The impact of this uncertainty is something that is often underestimated by retirees.

Common issues with a Life Annuity(Income for Life)

Retirees often steer away from life annuities as they find it difficult to part with their hard-earned retirement capital. Even though the purchase of an annuity income is compulsory and legislated, this separation anxiety from the accumulated retirement savings may be unsettling to some retirees.

In an ideal scenario, a retiree would be reassured that their income would be pre-defined, continue for the rest of their lives and their capital would be paid to their beneficiaries after they have passed away. This is entirely possible, however the guarantee of the capital usually depends on a life cover policy which adds a layer of cost to the retirement income. More importantly though, this requires the retiree to be medically underwritten as well and, at retirement age, not everyone is healthy enough to meet underwriting requirements.

That said, there are some really progressive solutions out there recently which provide a best of both world solution for retirees. Coupled with an sustainable annuity rate, retirees can rest assured that their income and legacy may continue for years to come.

If you need help with understanding this more, please leave a comment below or reach out to me and I will gladly help.

– TN