Choosing an ideal income

WHAT YOU NEED TO KNOW TO MAKE THE BEST DECISION UPON YOUR RETIREMENT

- Devon Card

A critical decision at retirement is whether to use your funds to purchase a life or living annuity, making it essential to understand the differences between these two options.

In this article, we explore the key differences and highlight the important factors to consider when making this significant financial choice.

Nature of the annuity

Understanding the nature of each annuity is crucial, as it significantly influences retirement and estate planning decisions.

A life annuity is an insurance policy entered into by the annuitant and the insurer, wherein the insurer guarantees a predetermined income for the annuitant's lifetime. The policy terminates upon the annuitant's death.

The annuitant can choose how the income should escalate to offset inflation.

In contrast, a living annuity is an investment held in the annuitant's name, often managed on a LISP platform.

The annuitant decides the income drawdown, within the prescribed range of 2.5% to 17.5% annually. Upon death, any remaining capital is passed on to the annuitant's beneficiaries.

Longevity

With a life annuity, the insurer guarantees a fixed income for the remainder of the annuitant's life.

In the case of a joint life annuity, the policy typically continues to pay out until the second spouse dies, thereby transferring the longevity risk to the insurer.