Life Annuity or Living Annuity? Here's What You Need to Know Before You Decide.

1. Life Annuity

What is a Life Annuity?

A life annuity is a financial product where you exchange a lump sum (e.g.,

from your retirement savings) for a guaranteed income for life. The income

is paid by an insurance company and is typically fixed or increases annually

by a predetermined rate.

Key Features:

Guaranteed Income: You receive a fixed income for life, regardless of how long you live.

No Investment Risk: The insurance company bears the investment risk, so your income is not affected by market fluctuations.

No Capital Left for Heirs: Once you pass away, the income stops, and

there is no remaining capital to pass on to beneficiaries (unless you opt or a guarantee period or spouse’s annuity).

Inflation Protection: Some life annuities offer inflation-linked increases to protect against rising living costs, but at a cost.

Simplicity: No need to manage investments or worry about market performance.

Pros:

Predictable Income: Provides financial security with a guaranteed income for life.

No Longevity Risk: You won’t outlive your savings.

Low Maintenance: No need to monitor investments or make decisions.

Cons:

Lack of Flexibility: Once purchased, you cannot change the terms or access the capital.

No Inheritance: The capital is fully absorbed by the insurer, leaving nothing for heirs (unless additional options are selected).

Limited Growth Potential: Income is fixed and does not benefit from market growth.

2. Living Annuity

What is a Living Annuity?

A living annuity is a flexible retirement product where you invest a lump sum (e.g., from your retirement savings) and draw a regular income from the investment. The income is not guaranteed and depends on the performance of the underlying investments.

Key Features:

Flexible Income: You can choose your drawdown rate (between 2.5% and 17.5% of the fund value annually).

Investment Risk: You bear the investment risk, as the income depends on the performance of the underlying investments.

Capital Preservation: The remaining capital can be passed on to beneficiaries upon your death.

Control Over Investments: You can choose how the funds are invested (e.g., equities, bonds, cash).

Adjustable Terms: You can change the drawdown rate annually to suit your needs.

Pros:

Flexibility: You can adjust your income and investment strategy based on your needs and market conditions.

Estate Planning: The remaining capital can be left to beneficiaries.

Growth Potential: If investments perform well, your income and capital can grow over time.

Cons:

Investment Risk: Poor market performance can reduce your income and

deplete your capital (i.e. think about the tariff wars happening now)

Longevity Risk: If you live longer than expected or withdraw too much, you could run out of money.

Complexity: Requires active management of investments and regular reviews to ensure sustainability.