Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
105. Living annuity - the intricacies of it
Felicia joins us on "Know Your Money." Our discussion focuses on the intricacies of living annuities, including the often confusing process of transferring them between providers. Learn how to navigate the Insurance Act and Prudential Communication regulations effectively, and discover why consolidating annuities might be a smart move to optimize your platform fees and streamline your financial strategy. With expert insights from Craig Finch and Bronwyn Waner of Growth Financial Planning, along with Warren Grimsley from Rogue Media, this conversation is your gateway to mastering your financial future.
Explore the nuanced world of annuities as we distinguish between living and life annuities, decoding the transition possibilities between these financial instruments. Felicia sheds light on the lack of beneficiaries in life annuities and the importance of guaranteed income, underscoring the critical role of financial advice in these decisions. With our engaging dialogue, we cut through the complexities to provide clarity and understanding, making this episode an essential listen for anyone aiming to make informed decisions about their retirement funds. Tune in for a transformative discussion that promises to enhance your financial acumen.
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Welcome to Know your Money, where we will explore our relationship with money and how the psychology of it impacts our financial decisions, as everyone thinks about money differently. In our podcast, we'll be presenting a variety of financial topics in an easy to understand way, which we hope will assist you with managing your money.
Speaker 2:Hi, I'm Craig Finch, co-owner of Growth Financial Planning, an independent financial planning practice, and I've been a financial planner since 1986.
Speaker 1:Hi everybody. I'm Bronwyn Wehner, co-owner of Growth Financial Planning. I'm a certified financial planner and our philosophy at our company is to grow yourself to grow your wealth.
Speaker 3:Hi everyone. My name is Warren Grimsley. I'm a director at Rogue Media and help facilitate this wonderful podcast. My main goal here is to try and understand what these two lovely people are saying, so that we can all understand.
Speaker 1:Hello everybody, welcome to Know your Money. Felicia, thank you so much for being back here with another awesome episode Today. We want to kind of stick with the living annuities and just find out can you say, have a living annuity at one provider and two living annuities at another provider? Are you able to move them to the same provider, and would it then be one living annuity that you have, or would you have three different living annuities then, but at least with one provider?
Speaker 4:So you can transfer living annuities and the whole transfer process is governed by with um. It's governed by the insurance act and uh prudential communication one of 2021. So transfers were I think the old name for transfers were directive 135s for living annuities. Um, so, yeah, you can and you can. So you can move your living annuity From one insurer to another insurer and once you are with the other insurer, you'll then have multiple living annuities and, depending on that insurer's systems, maybe they're capable of then Consolidating. Consolidating those living annuities into one, but yes, you definitely can transfer Living annuity from one provider to another provider. Then consolidating those living annuities into one, but yes, you definitely can transfer living annuity from one provider to another provider.
Speaker 2:So would you do that just to help your platform fee Because you have more assets at the one at, like Allen? Gray and your platform fee will be more competitive. Yes, yes, yes. And do you have to take the full living annuity with whatever portfolios were at the last insurer?
Speaker 4:Yeah, so you have to take that full value of that living annuity.
Speaker 2:You can't transfer only a portion, but even the portfolios, all the underlying portfolios.
Speaker 4:You can decide. Yeah, you can decide on the new platform. Yeah, if you want to switch into different funds.
Speaker 2:So the only reason would be maybe, that you don't think the old platform is efficient enough, and secondly, that you're going to get perhaps a better fee on consolidation yeah.
Speaker 1:Okay, awesome. And then just in terms of living annuity. So we have spoken previously about a living and a life annuity. So a life annuity is you give a lump sum of money and they guarantee a certain income and if you have to pass away the next day then that money sort of gone or you can have the guaranteed terms. Can you change your living annuity into a life annuity at any point?
Speaker 4:Yes, you can. So you can change your living annuity into a life annuity, but you can't do the inverse. You can't change from a guaranteed life annuity into a living annuity.
Speaker 1:Does that make sense, Warren? Because if it's not making sense for you… Of course it does. Your face expressions are not showing that.
Speaker 3:That's my thinking face.
Speaker 2:So the life in UT? Yeah, it's a lump sum. You pay for the rest of your life, but there are guarantees Until you unfortunately are gone.
Speaker 3:But there are other guarantees and obviously with a life you don't get to have beneficiaries, it doesn't get passed on. Is that right?
Speaker 1:So it depends, if you put a guarantee on there, you can do a guaranteed term or you can do a joint thing.
Speaker 2:Why do people make these things so complicated?
Speaker 1:It's very complicated, but the point of a life annuity… that's why I need a financial advisor, you know.
Speaker 3:It's just over complicated, isn't it?
Speaker 2:no-transcript, and often there's a good idea to blend it, because at a point in time you want to know that your income is secure. A portion of your income is secure to pay for, say, the basic essentials in your retirement, and then the rest you can invest in the market and get the ups and downs of the market as well. Okay.
Speaker 1:So can you take your living annuity that has 2 million rand in it and take a million rand of it and say, okay, I want to take out a million rand from here and put it into a life annuity and leave the other million in the living annuity, are they?
Speaker 4:allowed to do that Unless, as Craig had mentioned, blending unless you're doing it in that way, you can't. So you can't split a living annuity once you're in a living annuity, you can't split it so that it's multiple living annuities but you're saying you can now be in a living annuity and then switch it to a blended annuity.
Speaker 1:Is that what you're saying? Do you want to maybe give some?
Speaker 2:So Just Retire is one of the partners that Ellen Gray have done due diligence on and they do the life annuity scenarios and Ellen Gray's platform will allow you to take a portion of your living annuity and switch portfolio. So you switch into the Just Retire life annuity and then that portion is guaranteed as a life annuity, but it's a portfolio switch, so it's called a blend. Felicia's right, you can't say I'm going to split it, I'm going to take half of this out and give it to another.
Speaker 2:Assurer or anywhere else you can't do that, but within your living annuity you can do a portfolio, switch into a life annuity.
Speaker 1:So, for example, the client is getting 10,000 Rand a month from his 5% drawdown. He can say I need to guarantee 5,000 Rand a month. So he would take a portion of the lump sum that's available there and put that into a portfolio that's set to give him the 5,000 for life right.
Speaker 2:Correct.
Speaker 1:And then the other balance of that 5,000 Rand would have to come from a 5% drawdown.
Speaker 3:Don't ask me, I don't understand.
Speaker 1:But ask questions because we want to help you understand for other people. If you have any, if you want to plead the fifth, you can.
Speaker 3:Okay, so it just seems like it keeps getting more convoluted, though. So okay, you turn it into a blend of a life and a living annuity.
Speaker 2:Yeah.
Speaker 3:Is that a one-time thing? You can only do once? Well, sort of, because if you give, that.
Speaker 1:So if you want 5,000 Rand a month, you're going to give let's call it 2 million Rand for that 5,000 a month. So if you still have another 4 million Rand of that 4 million, you could add more to the blend but you can't come back from a blend.
Speaker 2:It's a one-way street. Yeah, one way, yes, and you tend to do it later. The older you are, because your life rates are a lot better, the older you get Right. The older you are, because your life rates are a lot better, the older you get Right. So you may consider it later in life, later in your living annuity, not earlier Right. You might not do it initially, although it depends on the interest rates. At the time, the last year, the interest rates have been very good, so it was more appealing to buy a life annuity than a living annuity, because the rates were very good and you know that they're guaranteed, whereas the living annuity depends on the market and what the market does. Okay, so that's a.
Speaker 1:Hmm, awesome, I don't know. Is there anything else you want to add or you think is important?
Speaker 4:What I'd like to mention also is I think sometimes people get confused with regards to the whole like splitting thing, with regards to can you like split an LA into multiple LAs, and I think the basis for that is because that's allowed with retirement benefits. So when you are retiring, coming out of a retirement fund, you can choose to purchase multiple living annuities or you can choose to do a combination of living annuities and life annuities, but once you're in the living annuity, you're in, you can't split.
Speaker 2:So when my Alan Gray RA is getting ready to purchase an annuity, so when my Alan Gray RA is getting ready to purchase an annuity, I have the option of the one RA being directed into a life annuity, and some are directed to a living annuity. At source, yes, but once it's in the product, that's in. Well, it depends on. You can go from living into life Into life.
Speaker 4:Yes, yeah, so you can split your retirement benefits, but you can't split your living annuity once you're in Good idea.
Speaker 1:Makes sense right.
Speaker 2:But it goes back to this Warren financial planning. You need somebody, especially at retirement, because now retirement is another whole different phase of your life and what we make sure that you hopefully your income is going to last you for the next 50 summers and that your tax is efficient, and that's important.
Speaker 3:As we live. Longer isn't a life, annuity better it's a sweet spot in a way.
Speaker 2:So it depends, because you could purchase a life annuity at a very good rate, a good interest rate and a good escalation rate, and the escalation rate is to take into account inflation.
Speaker 3:Yes, yeah, yeah.
Speaker 2:So I have a life annuity that's going more than 32 years, that at point of entry the increase is 9% and at the time inflation was running up to 15%. So it wasn't really good at the time but it was the best that the life companies would offer. Now inflation is running at 4%. That life annuity has way exceeded the income needs because it's gone up with much more than Can you give the figures for context?
Speaker 2:Okay, so 32 years ago, 138,000 was invested in this life annuity. Okay, and they paid every year. So this year, 32 years later, the annuity paying out is 80,000 Rand.
Speaker 1:For the year For the year.
Speaker 2:So 130 started, now 80,000. Now you take that back 30 years. It's incredible. So that was much better than any investment you could have got.
Speaker 3:Yeah, those, because she lived long. They must hate you. No, for sure they want you gone.
Speaker 2:No, because she lived long and the inflation rate was at 9%, where inflation is running at 5%.
Speaker 3:Yeah.
Speaker 2:So it all depends. It can work in your favor or against you.
Speaker 1:And that's where I think the blend and the conversation is so important, because there are certain aspects that you should always protect. You know a certain amount to guarantee that you're going to get that, but with the rest of it, sometimes you do want to take a chance in the markets because you want to try earn that additional interest, like with her. It's an exception where she's done it the other way around, but you need a bit of both, I think.
Speaker 2:Yeah, because if interest rates are low, then your annuity rate will be low, your pension will be low and the market might be running, might be doing way above that, which often does. So, yeah, so, but it's very important to sit down with us at the time.
Speaker 3:At what age can you purchase a life?
Speaker 2:Same when you are at 55, from age 55 on it.
Speaker 3:You just said you've had it for 32 years, though.
Speaker 2:This lady, so she's….
Speaker 3:Oh, this lady, I thought you were saying you, no, no, no, ah, it's okay.
Speaker 2:So it all ties into when you're a dad, when she's retired and she's been receiving this pension for 32 years.
Speaker 1:But at the same time there is also which we'll have to do in. Another whole episode is voluntary purchase annuity. So you can give someone this lump sum and guarantee a certain amount, and that's for terms. It's not always necessarily linked to your retirement, but it's a whole episode, I think, awesome. Thank you guys, so much thank you for coming through, felicia, and for all of your help.
Speaker 2:Thanks for having me thanks so much bye bye. Thank you for listening. If you have enjoyed this podcast, would like to subscribe, please visit our website, wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.