The battle of the annuities – helping your clients make an informed choice

Adapted from the articles ‘How to fund a retirement income for life’ and ‘A love hate relationship with annuities’ by Karen Wentzel, Head of Annuities at Sanlam Employee Benefits
 
Retirees have a range of needs and face various risks that threaten the longevity of their capital
When your clients near retirement and must choose a product that can provide them with a regular income in retirement, they essentially want three things:

1. investments that offer good returns and some investment choice,
2. protection against the risk of poor investment returns that erode the value of their capital as well as the risk of outliving their money, and
3. access to their capital for emergency and ad hoc expenses, before and after their death.

It is unlikely that a single retirement product will meet all the needs of retirees
Every financial product has different benefits, disadvantages and costs. Incorrect product advice, different opinions and a misunderstanding about the features of products often result in investors experiencing mixed emotions and confusion. This is especially true for annuities. That is why it’s essential to provide your clients with a clear breakdown of the advantages and disadvantages of the different types of annuities available. The following table may be helpful to share with your clients.
The key features of guaranteed annuities and living annuities

Composite annuities can meet a wider range of needs but must be carefully considered
Hybrid or composite annuities, which combine guaranteed and living annuities, is one way in which to address retiree’s needs more effectively, through access to good returns, protection from risk, and access to capital. One of the most popular versions of composite annuities is buying a living annuity that gradually phases into a guaranteed annuity over time. The timing of the phasing-in is, however, crucial – how do you know when is the optimal time for your clients to do this? The table below provides some insights:
Comparison of a guaranteed annuity to a living annuity phasing into a guaranteed annuity

With increasing age, the member becomes a select life and a guaranteed annuity becomes relatively more expensive. The table shows that if a guaranteed annuity is ultimately more suitable for a client who is invested in a composite annuity, the best time to convert to a guaranteed annuity is therefore as soon as possible.
Make sure your clients understand the long-term impact of their decisions
When they are armed with the necessary knowledge they can make an informed choice about which annuity option is more suitable for their specific circumstances. This can mean the difference between a happy, stress-free retirement or constant anxiety over their finances.