Now that we’ve made a comparison between life annuities (linked to investments) and life annuities (guaranteed) in parts 1 and 2 of this article series, we can elaborate on the hybrid annuity option.
I concluded in Part 2 that you don’t have to choose between the benefits of a life annuity or a life annuity, but you can find a balance between securing an income for the rest of your life and having more flexibility in terms of the income itself and the underlying investment portfolio of your annuity, as well as leaving a legacy for your beneficiaries.
Combine options
First, you can combine these two options by purchasing two separate annuities, i.e. investing part of the available retirement benefit in a life annuity and buying a life annuity with the balance.
In doing so, an advisor typically tries to cover your absolutely necessary expenses from the life annuity income and then cover the rest from the life annuity income.
Another option is to invest in a hybrid or blended annuity, giving you the flexibility to have your cake and eat it too, in a single investment product.
The hybrid option
More and more service providers are offering a hybrid/mixed option. Mixed offers the possibility of partially profitable on the inside life annuity. You can balance the various trade-offs by transferring additional tranches into the guaranteed life annuity component when you need them and build an optimal portfolio over time.
Just Retirement, a hybrid annuity provider, summarized the benefits as follows:
Again, looking at these benefits, it would greatly depend on each individual’s personal situation as to how they would go about combining the two types of annuities.
As I mentioned, non-negotiable expenses should generally be covered by the guaranteed annuity, with the most variable expenses then able to be covered by the income from the life annuity.
Let’s look again at Sue Smith, using the example in part 2: she still has R1 million to invest, to provide her with a monthly income, but in this scenario she is investing in a hybrid annuity – with R700,000 allocated to the guaranteed part to cover its basic expenses, and R300,000 allocated to the subsistence annuity part:
| Hybrid annuity | ||||
| Guaranteed annuity | life annuity | Total | ||
| Capital | R700,000 | R300,000 | R1,000,000 | |
| Income withdrawal | 7.35% | 5.00% | – | |
| Amount of monthly income | R4 287 | R1,250 | R5 537 | |
As I want to stress again, you will be allowed to convert portions of your life annuity to a guaranteed life annuity at any time. This can be useful to ensure a provision for increased expenses later in life. However, it is important to note that once you have moved a capital amount from a life annuity to a life annuity, you can never convert it back to a life annuity. This is the case whether you manually manage the balance between the two options or whether you invest in a mixed annuity.
Conclusion
For each individual, different combinations of all variables will apply, such as whether you add your spouse as an additional insured to the policy, whether you take a guaranteed period or not, whether you take increasing or level income, etc. will all have a significant effect on the income provided by the guaranteed portion of the annuity.
The life annuity portion will still operate the same as any other separate life annuity, where all the same rules apply, such as annual drawdown limits (2.5% – 17.5% per year, where the percentage and the regularity of the income can be amended once a year), the fact that you cannot take one-off sums from the capital and the possibility of leaving an inheritance to your heirs.
In addition, it is always important to keep a balance between your mandatory investments (retirement products) and your discretionary money. You can also supplement your retirement income from a discretionary investment portfolio. More on this subject in my next article.
If you are at a time in your life where you need to consider various retirement income options, please contact us. It is your freedom to shape your future.
