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Fixed-income annuities provide financial certainty post-retirement

As longevity statistics increase, the case for guaranteed or fixed income annuities has become stronger. In the last year, the World Economic Forum has published a white paper estimating the global gap in retirement savings to be $400 trillion by 2050. Craig Sher, head of research and development at Discovery, points out that as you live longer, your life expectancy grows. “So, if you reach age 65, your life expectancy goes up to 82 or 84. If you live to 85, your life expectancy goes up to 91,” he explains. Discovery statistics show that if you are 40 years old, you are likely to spend 42% of your life in retirement. If you are 35, 38% of your future life will be in retirement years. This means that most people are saving too little, too late.

When you retire, you have two annuity options available to you – a living annuity and a guaranteed or fixed income annuity. The living annuity allows you to vary the amounts you draw down each year – limited to a value between 2.5% and 17.5%. However, investors have found that these products require them to exercise financial discipline in order to optimise the longevity of their retirement savings.

According to the Association for Savings and Investment South Africa (ASISA), the average living annuity drawdown rate increased from 6.44% to 6.62% in 2016. This illustrates the impact on the sustainability and longevity of retirement capital for retirees. For example, if you retire at age 65, start drawing income at 6.62% and increase your drawdown each year in order to keep pace with inflation, you will reach the maximum income withdrawal of 17.5% within 18 years of retirement. Basically, the effect of inflation will not allow you to continue drawing enough to meet your monthly expenses after the first 18 years of retirement.

A guaranteed or fixed income annuity, on the other hand, provides you with a specific income over a specified period, offering you protection against the risks of longevity and volatile investment returns. If you choose a Fixed Retirement Income Plan from Discovery Invest, you can select your guarantee period, such as 10 years, which means that if you die before the period is up, the annuity payments will continue to be paid to your heirs or your surviving spouse until the end of the guarantee period.

Discovery Invest special offer – 10% additional income for three years

In celebration of Discovery Invest’s 10-year anniversary, the company is offering clients the opportunity to invest in a Fixed Retirement Income Plan with an additional 10% income for the first three years. The 10% is an addition to the annuity income amount, after allowing for annual escalations and before deducting tax.

After three years, the client’s annuity income will return to the quoted income annuity amount before deducting tax. For single-life annuities, the 10% additional income will stop after three years or when the client dies. For joint-life annuities, the 10% additional income will only be applied to the current amount in payment and will stop after three years or when both annuitants have died.

For example, Jessica (55) and Dave (54) invest R1 000 000 into a Fixed Retirement Income Plan with a 10 year guarantee term, 0% escalation rate and a 25% reduction on death of first spouse. Their quoted annuity amount before tax is R7 800 a month. With the special offer, their annuity amount is increased by 10%. The gross annuity income will be R8 580 (R7 800 x 110%) They will receive a higher income of R8 580 every month for the next three years.

Nothing contained herein should be construed as financial advice and is meant for information purposes only.

Discovery Life Investment Services (Pty) Ltd branded as Discovery Invest is an authorised financial services provider. Registration number 2007/005969/07.

Product Rules and Terms and Conditions Apply.

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