Choosing an annuity for retirement – which one is ‘just right’?

Most of us are familiar with the fairy tale of the curious little girl who, on entering an empty cottage belonging to three bears, struggles to find the right fit for her needs, from the temperature of her porridge (too hot, too cold, or just right) to the comfort of a chair and bed. 

Although Goldilocks was presumably quite away from retirement age, the story does highlight that a one-size-fits-all solution in most circumstances is an exception. This is especially true when it comes to finding a retirement product. 

In the past, retirees have been limited to choosing between a life or a living annuity at retirement. However, the landscape has evolved and advisers have access to new-generation annuity solutions (or a combination of solutions) that are ‘just right’ for their clients, taking their personal circumstances and risk appetite into account. 

Living Annuities – Too Hot? 

A living annuity allows for flexibility to decide how much income to draw each year, as long as it is within the regulated limits of 2,5% to 17,5% per year. But it also comes with investment risk and sequence of returns risk. There is also a chance that the underlying investments in the living annuity perform poorly, resulting in retirement capital that either doesn’t grow enough to give pensioners a sustainable income or simply gets depleted. There is no guarantee that income will last for life. 

Life Annuities – Too Cold? 

Life annuities are an insurance product. They offer less flexibility but greater security, as income and expected annual increases are priced in at the start. With a life annuity, pensioners are guaranteed a monthly income that never decreases. This can be set to meet their essential expenses for life, eliminating the risk of living longer than their retirement nest egg can cover. 

Blended Annuities – Just Right? 

A blended annuity could be ‘just right’. It combines the benefits of a living annuity and a life annuity in one investment. The policyholder decides how much of the investment is flexible (living annuity) and how much is secure (life annuity). Looking at their wants and needs, projections can show the impact of different blends on income and capital over time. This can help advisers and clients decide how best to allocate to the two components that make up the total annuity income from the ‘blended’ annuity. 

And it does not need to be an all or nothing decision. Clients can manage the risk of outliving their savings in a blended annuity by allocating more to the guaranteed component over time.