Blending diverse solutions for the optimal retirement outcome

If a living annuity is selected, the advantages of the product, such as capital inheritance and income flexibility, as well as the diversification of investment among funds, geographical regions and asset classes would be what the client values, and the proposal to the client would include the selection of funds, the types of assets to invest in and the ideal split between local and offshore funds - of course within the limits of risk the client is prepared to endure.

If the client highly values financial certainty and wants a guaranteed income for life, a life annuity would be preferred, and its proposal would focus on the rate, which determines the income, the income escalation and whether a capital guarantee in the form of a life policy should also be included.

How market conditions shape decisions

Market conditions shape clients’ decisions. During periods where markets struggle, guarantees in the form of life annuities are often favoured, as clients prefer the safety, believing that markets will stay that way.  Uncertainty in the markets also lead to elevated bond yields, which in turn translate to higher guaranteed rates and therefore a higher guaranteed income from a life annuity.

In contrast, during periods of strong market rallies, investors often assume that the good news will continue, and that the double-figure market returns will always be available.  During such a period in the market, investors tend to focus more on living annuities.

In addition, a financial adviser’s own perception of the future often rubs off on the investor’s choice between a living annuity and a guaranteed life annuity.  This choice between the two options, however, does not incorporate true diversification.

Incorporating true diversification

Advisers who recognise that current market conditions won’t continue forever, are prepared to take the next step to help their clients diversify their retirement income even further.  They recognise that by combining a living and a life annuity at retirement, they can offer the client the best of two worlds:  The guaranteed portion protects the investor against the risk of longevity, while the living annuity component offers flexibility in income as well as the prospect of leaving a legacy.  This can be described as the second level of diversification, where components of each are blended into one solution.

Considering future income stream management

The third level extends beyond traditional diversification by incorporating the concept of time into the strategy.  At this level, the financial adviser recognises that the future might hold unforeseen stumbling blocks, as well as opportunities, which might not currently be real or expected.  For such an adviser, the management of their client’s future income stream is paramount.  If their client had to face an urgent financial need in future, such as where a medical condition is not fully covered by their medical aid, the flexibility of income withdrawals from a living annuity can provide crucial support.  Since a living annuity income may be altered once a year, the client will then have the option to increase the income from the living annuity for a year or two to cover the extra expenses.  Although this might not be an ideal solution, the flexibility will be able to solve a serious problem for the client.  The portion invested in a living annuity can therefore serve a dual purpose, functioning as both a retirement income source and a potential emergency fund for future needs.

A second deferred opportunity that might arise is the purchase of a second life annuity sometime in future.  Here the adviser acknowledges that guaranteed rates may in future be far better than what is currently the reality, ensuring a higher guaranteed income for a client when they’re older.  Instead of locking all guaranteed rates into a single event at retirement, combining a life and living annuity enables diversification of timing of entry into the guaranteed income environment.  Some platforms offer the opportunity to split the remaining living annuity into another combination, which means a portion of the flexible living annuity can be retained at that point.

Retirement income diversification is about far more than selecting one most appropriate option at a certain point in time.  True retirement income diversification should be more about how different retirement products can be blended to cover for immediate, and possible future needs.  True retirement diversification is therefore not only about fund choice or asset and geographical blend, but also about product combinations and diverse entry points along a future timeline.   Such a multi-layered diversification model presents the most effective way to manage a client’s future income stream. DM

Author: By Rocco Carr, Business Development Manager at Glacier by Sanlam

Read more about designing a retirement that evolves with you.

About Glacier by Sanlam

Glacier by Sanlam is your trusted partner in unlocking infinite investment opportunities. As the largest linked investment service provider, we have led the way in meeting the diverse needs of South Africans for over 27 years. Our extensive range of local and international solutions empowers investors to create, grow, and preserve their wealth. Through innovative products and expert advice, we offer infinite opportunity to achieve financial success.

Glacier Financial Solutions (Pty) Ltd is a licensed financial services provider.

Sanlam Life Insurance Ltd is a licensed life insurer, financial services and registered credit provider (NCRCP43).