Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
149. Life vs. Living Annuities: Finding Financial Security in Retirement
Retirement planning in South Africa has undergone dramatic shifts over the decades, and understanding these changes could be crucial to your financial security. Our conversation with Clive Lazar from Just Retirement reveals fascinating insights into how South Africans' retirement preferences have evolved from predominantly life annuities before 2000 to overwhelmingly favoring living annuities by 2020.
What's particularly eye-opening is how global events reshape our financial decisions. The COVID-19 pandemic triggered a significant shift back toward guaranteed income solutions, with many retirees suddenly prioritizing certainty over potential growth. Lazar explains how high bond yields during this period created particularly attractive annuity rates, allowing retirees to lock in generous guaranteed income for life. As markets have since stabilized, we're witnessing yet another pendulum swing in preferences.
Perhaps most valuable for listeners considering retirement options is the discussion around blended annuity solutions. Rather than choosing between a living annuity (with its flexibility and growth potential but sustainability risks) or a life annuity (with guaranteed lifetime income but less flexibility), you can now combine both approaches on platforms like Allan Gray. This innovative strategy allows you to secure essential monthly expenses with guaranteed income while maintaining investment control over the remainder of your retirement capital. The alarming revelation that roughly two-thirds of living annuity holders analyzed fall into "risky" or "danger" withdrawal zones underscores why this blended approach deserves serious consideration. Whether you're approaching retirement or already managing your retirement income, this episode offers crucial perspectives on creating a sustainable financial future that balances certainty with opportunity.
Ready to rethink your retirement income strategy? Connect with a qualified financial planner who can help you determine if a traditional, living, or blended annuity solution best suits your unique circumstances.
Please subscribe to our podcast or have a look at our website
www.growthfp.co.za
Hello everybody, welcome to Know Your Money. I'm Bronwyn Wayner.
SPEAKER_01:And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast. Clive Lazar, welcome back to the studio from Just Retirement. We've had some incredible discussions and insights on another way of looking at annuities. And I was just going to ask you today, um, well, first good good morning. Sorry. Morning, Bronwin. Jumping into such an exciting topic. So the industry, lots of the industry, the buzz is around living annuities. So that the living annuity we have discussed in the past our listeners, but a living annuity is the annuity or the pension will pay out as long as the money lasts. So it doesn't depend on how long you live. So if you have a bad investment or you draw too much, there's a chance that your capital won't last. But from your perspective, you aren't in that field at all. You are in life annuities, as you explained to us in previous episodes. And in your experience, from the industry side or for what you experienced for just retirement, how many of a sample, how many are percentage-wise of life annuities are taken out by clients versus living annuities? And why would you do a life annuity?
SPEAKER_00:Sure, that's a great question. So yeah, the statistics um change. So historically, way back um I would say before the beginning of 2000, the statistics seemed to indicate that there was sort of like a 60-40 split. So um 60 or even 70% of people used to buy the traditional life annuities where they provided that guaranteed income to for themselves for their lifetime, and maybe 20-30% went into living annuities. At the turn of the century in 2000, going forward over the last 20-25 years, we've seen a huge amount of clients go into living annuities, and living annuities becoming a lot more popular than your traditional life annuities. Um the statistics seem to indicate, I would say up until probably COVID, that it was a 90-10 split. In other words, you know, nine out of every 10 clients were retiring and putting their money into a living annuity. And a living annuity is an unbelievable product. You know, it's a drawdown product, it provides the flexibility that you can change your income, you can leave your legacy, a legacy benefit, you can grow the capital, but there of course are a lot of risks associated with it. You've got to make sure you manage your drawdown very carefully and you don't run out of money. Um so up until about 2000 um 2020 2021, we we we saw around about a 90-10 split. And I think ACISA supports those stats that I'm saying. What happened was that when COVID happened, there was um a big concern across the market, and particularly in South Africa, around guarantees, around uncertainty. And we saw a big move back towards your life annuities. Um I would say from COVID till about 2024, um the statistics seem to indicate more of a shift back towards life annuities, where it was another sort of a 70-30 split, 30% now going into life annuities, and 70% into living annuities. Um and now again it's changing. So markets have um you know settled again. We've seen some nice growth coming through, and um once again we've seen um most people nowadays who are retired go back into living annuities and the the excitement of a life annuity sort of starting to dwindle. Remember, life annuities also became very attractive when rates, the annuity rates are very high because that was driven by long bond yields. Um perhaps uh in a different another episode we can talk about what's inside a life annuity. Because essentially what a life annuity is, is the insurance company takes that capital and buys um long bonds, nominal bonds, um, across the entire yield curve. And when the rates on those bonds are really good, which they have been in South Africa, those con the the those would then convert into a very attractive annuity rate. So people were locking into these really high annuity rates over the last couple of years. Rates have started to come off a bit, they're still juicy, um, but markets have started to pick up again. And as markets pick up, we see a move back towards living annuities.
SPEAKER_01:But Clive, you've also got a blended option, haven't you?
SPEAKER_00:Yeah, that's true. And the research that we've done in the industry and supported by lots of other research across the board seems to indicate that it's actually the debate's moved on. It's not so much anymore about the uh one versus the other versus the other. It's not a living annuity being better than a life annuity, they both have their place. And perhaps we can talk about why we believe there is a place for life annuity in somebody's decumulation strategy. Um, but talking to that specific point, we now know that what one can do is one can have a blended solution. In other words, you can combine the benefit of both products in one. Um, and that is available on certain linked investment service provider platforms where on that platform your client goes into a living annuity, and then inside that living annuity, they purchase a tranch of what we call lifetime income, which is life annuity. And that's really attractive because you get the benefits of that guaranteed income underpin coming through every month from the insurer into their living annuity, but at the same time, you keep the flexibility and the benefit of the legacy through the fact that you you remain in a living annuity.
SPEAKER_01:So on Alan Gray's platform that's available, am I right?
SPEAKER_00:Yeah, that is correct. So on Alan Gray, um they've been uh offering clients the ability to blend since probably 2019. Um, and slowly, slowly we're starting to see the market and advisors become a lot more interested in this blended solution um where it provides that flexibility for the client to have the benefits of both the life and the living. Maybe an interesting stat um to point out um for your listeners is that we've done quite an analysis on um various living annuity books across all different platforms. So we've looked at close to 30,000 living annuity clients. And what we've done is we've um we've classified those clients into what we refer to as three different zones a safe, um a risky, and a danger zone. Um so in other words, we looked at the capital amount and we looked at their drawdown and we plotted or put it put them into a specific zone depending on their drawdown rate. Because you know, a lot of people think, oh, well, I've got 15 million, but if I'm drawing, for example, more than six, more than six and a half, seven percent on that twenty million, um, then you know it's not sustainable. So we've classified it into those three zones. And at a high level, what we see is about two-thirds of the members that we've analyzed are in either a risky or a danger zone, and about one-third are in a safe zone. And I think the C Sys Stats support that um where you see across the board that the drawdown rates um are a little bit too high, making it become a problem over time of sustainability. So one of the benefits of blending is to improve the sustainability of that solution.
SPEAKER_01:So, in other words, the living annuity to Alan Gray would start all in the market, and then you could uh at a later stage take a portion, a third out or whatever, and purchase an annuity from just retirement. Is that correct? Craig, so the the product stays the same, the income just will just differ because you've bought the extra part, is that right?
SPEAKER_00:Yeah, so so the thing is you can blend for either an existing client who's already in the living annuity on the Allen Gray platform and maybe he retired a few years ago and he's drawing down, and now he sees and he's concerned about the sustainability, or you can also blend for a new retiree, somebody who's about to retire, and he says, Okay, I want to go into living annuity, but I want some guaranteed underpin, I want some security of income. We like to um advocate that it's it's it's as I said right at the beginning, it's not a uh one or the other, but using the life annuity to cover what we call your essential expenses. So everybody's got those fixed expenses each month, um, you know, their rent, their levies, their food transport, their medical aid, and we know those add all add up. Um the benefit of using a life annuity to match that liability is that you've taken that mortality or longevity risk off the table. Doesn't matter how long you live, the insurance company continues to pay that income for you, and you take the investment risk out of them, out of your um, you know, your your your your risk appetite there. And then you've still got the capital um in the other portion of your living annuity to grow and provide the legacy benefit.
SPEAKER_01:And you and you guys still do the underwriting the same way as you mentioned in the previous episode. That's right.
SPEAKER_00:So the minute you buy a life annuity, whether you buy it on a standalone basis from us or whether you buy it inside a living annuity, for example, on the Alan Gray platform, underwriting is always an option and can always lead to an uplift.
SPEAKER_01:Amazing, thank you so much. These are great products to share with us. Thank you. And it's a unique way of looking at annuities, which is the market needed it, I think, and it was really good that you've come in. Also explaining how just retirement is backed by an international company, so they're not just some small player in the market. Clive, thank you so much. Look forward to more episodes with you. Thanks, thanks, Craig and Dana. Thanks. Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website www.growth.fp.co.za information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.