Retirement planning isn’t a one-size-fits-all process. With the economy consistently changing and interest rates (and markets) fluctuating, financial advisers are challenged to design income strategies that provide clients with stability and growth. Therefore, understanding the role of guaranteed annuities and inflation-protected solutions is more crucial than ever.
Between June 2023 and June 2024, long-term bond yields were consistently above 11.5%, even breaching 13% twice. After June 2024, yields dropped to between 10.5% and 11%1. Even at these relatively lower yields, these conditions are still favourable for individuals considering a guaranteed life annuity.
For example, if a 60-year-old male purchases an annuity with R1 million today, he can expect an income payment of around 11% of his purchase amount in the first year from a level annuity, which offers higher initial payouts, or 7.5% from an annuity with 5% annual increases, which helps maintain long-term purchasing power2.
The decision between these options depends on factors like life expectancy, lifestyle goals, and inflation. While a level annuity offers a higher starting income, its real value can shrink dramatically over time. An annuity where the income increases by 5% or 7% a year can help protect purchasing power, ensuring that income remains valuable as costs rise.
One of the biggest risks clients face is losing purchasing power over time due to inflation. If inflation is at 6%, the income from a level annuity could lose more than half its real value in 15 years. Choosing a 5% yearly increase helps protect the income against inflation and maintains spending power for longer. Even better, opting for a 7% escalation or linking increases to the Consumer Price Index (CPI) can further preserve income and boost real spending power over time. When planning for retirement, it’s important to look beyond just the initial payouts and focus on long-term financial security and a comfortable lifestyle.
Finding the balance: Income and capital protection
People often worry about running out of money or not getting back what they originally invested. Adding a guarantee term helps reduce these worries by offering income protection and ensuring a certain payout period, regardless of how long the person lives. A level annuity with a 10-year guarantee ensures that even if the person passes away early, payments will continue to a beneficiary for at least 10 years. An annuity with an increasing income usually needs a longer guarantee period, around 15 years, to provide similar capital protection while allowing for future income growth. Over time, an annuity with an increasing income can pay out more, sometimes exceeding R4 million from a R1 million purchase during a long retirement. This highlights the need for careful retirement planning that balances short-term income requirements with long-term financial security.
The evolution of retirement solutions
For those looking for both steady income and a way to leave something behind for their loved ones, the Capital Protector offers a valuable solution. This option ensures that the initial purchase value remains intact by combining a life annuity with a life cover product that does not need underwriting. People benefit from a stable and predictable monthly income while also securing a financial legacy for their beneficiaries for a monthly premium. The initial purchase amount can be passed on tax-free, making it a great option for those who want both income security and estate protection.
Tax implications
Tax implications play a key role in retirement planning, and they are often overlooked. Different annuity options have varying tax and inheritance consequences.
- A life annuity can leave remaining income to beneficiaries if the person dies during the guarantee term, but the value decreases over time.
- A living annuity offers flexibility but is exposed to market risks and could run out if withdrawals are too high.
- The Capital Protector ensures a steady income while preserving capital for beneficiaries, with the added advantage of tax-free payouts upon death.
Understanding these differences helps retirees make smarter financial choices that align with their personal and family goals.
Navigating today’s retirement landscape requires a thoughtful approach. Advisers should focus on three key principles:
- Protecting against inflation by structuring income to handle rising costs;
- customising guarantee terms to suit individual client needs; and
- exploring hybrid solutions that combine guaranteed income with:
- legacy planning; and
- market exposure.
Advisers can help clients make smart decisions for a secure retirement by using modern financial tools and data-driven insights.
The future of retirement planning depends on flexible, resilient strategies to give clients the confidence to retire comfortably, no matter what happens in the economy.
The Guaranteed Annuity and the life insurance policy for the Capital Protector are life insurance products, underwritten by Momentum Metropolitan Life Limited, a licensed life insurer under the Insurance Act. Momentum Wealth is part of Momentum Investments and Momentum Group Limited. Momentum Wealth (Pty) Ltd is an authorised financial services provider (registration number 1995/008800/07, FSP number 657). Momentum Metropolitan Life Limited is an authorised financial services and credit provider (registration number 1904/002186/06, FSP number 6406).
