What exactly is the Flexible Annuity?
The Flexible Annuity is a product that provides for an income after you have retired which is linked to investment portfolio performance. The income is paid as a percentage of the policy's investment value each year with the income amount deducted from the policy's investment value. The product allows you to choose the income amount you require for each year but with the intention of the product to provide an income for life. The flexibility of the offering enables you to enjoy the potential growth if the market performs well which will see your total investment grow. If managed correctly, this then increases your ability to draw a greater income.
The policy is made up of the following two benefits:
- The one portion is a Living Annuity Benefit – this offers the traditional workings of a Living Annuity. With its tax-efficient wrapper, flexible investment options allowing single portfolio drawdowns, and low product costs, this policy puts your retirement savings to optimal use.
- The other portion, which is optional, addresses the desire to boost your income to a level higher than you would traditionally attain. With the Income Enhancer Benefit, you can commit a chosen percentage of your retirement savings to a bonus pool. By selecting this optional benefit, you may enjoy a share of the pool’s bonus payout each year. This bonus is then transferred to your Flexible Annuity investment value, resulting in either an increased income that can be taken every year or additional investment growth within your policy.
Even with the commitment to the Income Enhancer Benefit, your full Flexible Annuity investment value is still invested in your choice of portfolios. You will continue to enjoy an income drawdown as a percentage of the full Flexible Annuity investment value during your lifetime.
- You must draw a regular income which can be between 2.5% and 17.5% each year of the full investment value of the Flexible Annuity. Each year you must review the annuity amount drawn in consultation with your financial adviser to ensure the income that you select is at a level that would be sustainable for the rest of your life. You need to carefully manage your income drawdown relative to the investment return on the policy in order to achieve this.
- You can choose the underlying investment choices and can change the investments in accordance with certain terms and requirements.
- Upon your death, the balance that remains in your annuity which was not committed to the Income Enhancer Benefit is paid to your beneficiaries and payment thereof can be structured according to their circumstances.
Income Enhancer Benefit
From the age of 55, the Income Enhancer Benefit is available for you to select – at this time, you can begin to supplement your regular income through an annual bonus which is paid into your policy. To be eligible for a bonus you need to commit a portion of your investment value to the Income Enhancer Benefit, which is transferred to the bonus pool when you pass away. The reality is that people are, on average, living longer due to enhanced medical technology. The Income Enhancer Benefit can significantly reduce your longevity risk by increasing your investment value to better sustain your income at your require level.
What is the advantages of choosing the Flexible Annuity?
There are a number of advantages, including:
- Investment choice: With a traditional annuity, you are not involved in the investment decisions. The Flexible Annuity gives you the control of the choice of investment portfolio but you carry the risk.
- Switching between portfolios is allowed at any time should investment needs change; no switching fees are currently paid except for any portfolio buy-sell spreads. (A buy-sell spread is where the selling price of a portfolio is less than the buying price and the difference is a charge).
- You can have your income drawn from your Standard Bank Money Market portfolio first rather than drawing your income from all your portfolios, at the same time. The more aggressive portfolios are then not depleted (lessening the possible growth opportunities) to pay your monthly income. This avoids you selling off units in more volatile portfolios when portfolio prices are depressed and enabling you to benefit from them when the returns are high.
- Investors who are concerned about markets falling soon after making their investment can elect to phase their investment into the portfolio(s) of their choice from a money market fund.
- Additional premiums are allowed at any time during the term of the policy, provided they are transferred from an approved retirement fund. You can also transfer living annuities from other providers to Liberty if you would like to access the Income Enhancer Benefit.
- The balance of your investment value, less the amount committed to the Income Enhancer Benefit, can be left to your beneficiaries when you die either in the form of a lump sum, or as an ongoing annuity (less any applicable tax). A major advantage of the Liberty’s Flexible Annuity is that the capital is not included in your estate for estate duties or executor's fees.
- A Flexible Annuity can produce inflation-beating returns with the appropriate investment strategies but is not guaranteed. If you rely on a fixed monthly income with no escalation your standard of income will decrease as inflation erodes your capital base.
What are the risks you should be aware of in selecting the Flexible Annuity?
Please carefully take note of the risks involved when choosing a Flexible Annuity. A Flexible Annuity should not be selected unless you have other sources of retirement income and then, only after consultation with a Liberty Financial Adviser. The following should be kept in mind:
- You run the risk of outliving your savings (known as longevity risk) if you draw too high an annual income from the plan, or the portfolio returns are lower or more volatile than planned for (known as investment risk). Consequently, you may not be guaranteed a particular level of income for life, with enough capital.
- With a well-executed plan not only will you enjoy the retirement you want but also leave your remaining wealth to your loved ones when you pass away. In order to manage your ideal income, inheritance and the risks of the annuity, you will require the expert assistance of a Liberty Financial Adviser who will guide you through these changes and implement changes to your Flexible Annuity policy. The ongoing advisory fee is the remuneration that you pay your Financial Adviser for this advice.
- Your beneficiaries will be entitled to the lump sum value of your Flexible Annuity investment value excluding the amount you have committed to the Income Enhancer Benefit. If you select the Income Enhancer Benefit, you must balance the need for a more sustainable income for life and the need to leave an inheritance to loved ones. The higher the committed percentage to the Income Enhancer Benefit, the greater the size of your bonus but the smaller the inheritance.
- If you have selected the Income Enhancer Benefit, then you will not be able to convert to a Life Annuity, transfer to another provider or commute the Flexible Annuity investment value.
Please consult your Liberty adviser or broker before entering into any form of annuity.