Life annuities and living annuities offer different pros and cons. Which one you choose, or whether you go for a hybrid that combines the two, depends on your needs, for example how important income certainty is to you and whether you want to leave an inheritance.

For more information on our products and services, visit our website, nedbank.co.za.
Engage with us on social media:
Facebook |
LinkedIn |
Twitter |
Instagram | …(read more)

LEARN MORE ABOUT: Retirement Annuities

REVEALED: How To Invest During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

Retirement Planning: What is the difference between a living annuity and a life annuity?

As you approach retirement, one of the most critical financial questions you’ll need to answer is how to create a reliable and sustainable income stream to fund your living expenses in retirement. To achieve this goal, many people rely on annuities. Annuities are a form of insurance that provides a regular income stream in exchange for a lump sum payment. There are two primary types of annuities: a living annuity and a life annuity.

Living Annuity

A living annuity is an investment-based product that provides retirees with a flexible income stream that can vary based on the investment returns earned on the annuity fund. The fundamental principle of a living annuity is that the retiree invests their savings in a basket of funds, and they draw down from the investment income on the portfolio. This type of annuity allows retirees to tailor their income to their needs, as they can elect how much they want to draw down each year. The key benefit of a living annuity is the potential for capital growth over time, which can potentially provide cost of living increases or inflation protection for the retiree.

However, living annuities are exposed to market risk, and therefore they are only suitable for people who are comfortable making investment decisions regularly. The retiree must also manage the withdrawal rate from the portfolio to ensure that their capital lasts throughout their retirement.

Life Annuity

A life annuity is an insurance-based product that provides retirees with a guaranteed income stream for life. With a life annuity, the retiree pays a lump sum premium in exchange for the insurance company to provide them with a guaranteed income stream for life, regardless of investment returns or market volatility. The rate of the income stream is determined by a variety of factors, including the age and health of the retiree, as well as interest rates when they purchase the annuity.

The key advantage of a life annuity is the guaranteed lifetime income it provides, which can reduce the retiree’s risk of outliving their savings. Another advantage is that life annuities don’t require the retiree to make any investment decisions, which can be particularly beneficial for retirees who are uncomfortable with investing or who want the stability of a guaranteed income stream.

However, life annuities do come with some disadvantages. Firstly, they are less flexible than living annuities. Once the retiree purchases a life annuity, they cannot change the level of income they receive, and they cannot access their capital. Additionally, life annuities have no inflation protection, which means that the purchasing power of the income stream will diminish over time as inflation erodes the value of money.

Ultimately, the decision to choose a living annuity or a life annuity depends upon the individual’s personal preferences, unique financial situation, and tolerance for market risk. The key is to find a balance between flexibility, guarantees, and the potential for capital growth that aligns with your retirement goals and objectives.