Compulsory Annuity Types

Posted in Communication   |   March 17th, 2020

An annuity is a pension bought by the accumulated capital at retirement  and in order to purchase an annuity best suited to your needs, you need to consider the following:

• Life expectancy
• How long are you and your spouse likely to live?
• Inflation
• What is the current financial situation in the country and how do you think this will affect future inflation?
• Interest rates – Do they generally keep pace with inflation?
• Market conditions – Is the stock market stable?
• Family needs – Will your family need life cover when you die and more importantly, do you have young or permanently dependent children?
• Risk profile – How much risk are you prepared to take with your personal finances?

There are three basic types of Annuities to choose from:

• Living Annuity
• Bonus Annuity
• Fixed Annuity

What is a Living Annuity and How Does It Work?

A Living Annuity transforms your Retirement Fund Benefit into a lifelong, flexible income with the capital available upon death. Investors can choose an annual pension, which varies between 2.5% and 17.5% of the capital, which can be adjusted on an annual basis. As an investor in a Living Annuity, you have a choice of investment portfolios such as:

• Money Market Funds
• Smoothed Bonus Funds
• Targeted Return Strategies
• The entire Unit Trust Universe
• Risk profiled managed solutions
• Index Tracking Funds
• Off Shore Funds
• Any combination of the above

With our professional guidance, you can structure your portfolio to meet your future income needs and your risk profile.

What is a Bonus Annuity?

Also referred to as ‘With Profits’  pensions are tailored to suit the needs of those who require less risk that is normally associated with Flexible Life Annuities, i.e. the risk of living too long with diminishing investments.

These products have been designed to offset the erosive effects of inflation on the purchasing power of a pension by providing for annual increases. Historically, these increases have closely matched or beaten inflation.

Initially, you will receive a competitive pension based on your needs and the expected future inflation rate. Each year your pension is likely to increase by a rate based on the investment returns achieved in the underlying investment portfolio, which is managed by the Life Assurance Company.

Once your pension has been increased, it may never be decreased, no matter how bad the investment performance may be in a particular year. For this reason, it is in the best interests of the Life Office to ensure that funds are invested in a stable portfolio.

What is a Fixed Annuity?

Fixed Interest Annuities are directly linked to interest rates and are fixed at the date of purchase.

Your annual pension increase is decided at the beginning and no changes can be made thereafter. This type of annuity offers no flexibility.

You have the option to choose two annuitants, usually husband and wife. The income can remain the same when the first annuitant dies, or be reduced by a percentage. You must, however, choose this percentage at the start.

You can choose a guarantee period for your pension.

An option for Capital Preservation by means of Life Cover is offered by some Life Assurers.

Professional Advice can assist with further explanations of the varying underlying cost structures for the options as well as the limitations for risk and reward of the options