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UNIT TRUSTS: Marriott Equit... Boland finds a super market for its serv... Sorry, even Rambo would be denied a refu... Living annuities not for the faint-hea... Coming to terms with unit trust volatili... |
Living annuities not for the faint-heartedThese products are not passive investments: they have to be actively managed to keep abreast of the markets FLEXIBLE or living annuities were launched in the late 80s and have proved to be a popular alternative to the traditional annuities. Two weeks ago we examined traditional annuities. To recap: a traditional (or conventional) annuity is the monthly pension income you are legally obliged to buy with the money you get from your pension fund or retirement annuity fund when you retire. The amount of pension or annuity income you receive depends on the capital amount you invest, the market interest rates at the time of buying the annuity, your life expectancy, and whether you opt for variations like an escalating income to protect you from inflation. The well-known drawback of traditional annuities is that you lose your capital the moment you buy the annuity, unless you are prepared to pay extra to guarantee getting some of it back if you die within the first few years (while you may not care two hoots about this, your heirs surely will). Living annuities were designed to overcome the shortfalls of traditional annuities. They are sold by life assurance companies and by the unit trust-linked product companies. Living annuities differ from traditional annuities in four respects: 1 The investor keeps control over her capital. She decides where her money will be invested - the options include an in-house portfolio run by the life assurer, a suite of unit trust funds, or money market investments. She can also switch investments at any time. 2 The investor determines the amount of her pension income by electing to choose a percentage of the investment amount (between 5% and 20%). You can change this percentage at any time. This flexibility allows you to take a low income in your working years when your tax rate is high, and a higher income when you stop working and your tax rate is lower. 3 Your heirs will get your left-over capital when you pass on. 4 There is no guaranteed annual income with living annuities. With a traditional annuity you are safe in the knowledge that you will receive a monthly income of a set amount. With a living annuity, income will vary depending on how your investment performs. Living annuities are great products, but they have their downside and are not suited to all investors. It is for these reasons that a living annuity is most suited to wealthier retirees, and then only for a portion of their retirement nest eggs. For retirees who will rely solely on their pension income during their golden years, the downsides of a living annuity may be too great to bear. BOE says the product adopts an investor-friendly charge structure that does away with high upfront fees of living annuities and lowers the on-going service fee.
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