What is it? It’s an investment that gives the investor flexibility to be able to invest in underlying investment funds and decide on their annual income within certain prescribed limits. The investor may decide to draw a slightly higher or lower income depending on the investor’s income needs. It also provides flexibility to change service providers, change investment strategy or purchase a guaranteed annuity at any time.
Any remaining capital upon death passes to the investor’s heirs. In exchange for this flexibility, the investor takes on the risk that the income may not last for the full term of retirement, especially if income withdrawal rates are high.
Inflation is another key concern if the growth of the underlying funds do not achieve targeted benchmarks.
Suitability: Those who choose this option, do so mainly because they want to maintain control of their money. It is important that the investor should have or seek investment expertise to do this.
Considerations: Although the flexibility is attractive, it is important for the investor to realize that they take on all the risks- investment market and behavioral. The investor must therefore have the right strategy and stick to it.
GUARANTEED LIFE ANNUITY
What is it? It’s an insurance product which provides an income for the duration of the life of a retiree. Income increases must be decided upfront. Investment market movements will not negatively affect the guaranteed income. Once the product has been purchased there is no flexibility to change- either in terms of income or switching to another product. Also, any remaining capital or income cannot be left to beneficiaries unless the investor has chosen a guaranteed term of income to be paid (so even if the investor passes away before the guaranteed term expires, the income will continue to be paid until the end of that specified term) or if the investor has elected a Guaranteed Joint Life Annuity (in which case the surviving spouse will receive a reduced income until their death).
Suitability: Those who typically prefer a guaranteed income expect to live longer, want peace of mind and are looking for financial protection in case of potential future cognitive decline.
Considerations: The insurer considers the health of the individual upon purchase by looking at lifestyle habits such as smoking and drinking, and conditions like heart disease and any life-shortening illness the investor may have developed.
The lack of flexibility means that unforeseen expenses cannot be funded through this solution.