Fareeya Adam, head of guaranteed annuities at Momentum Wealth
Market returns are volatile in a world where uncertainty is the order of the day. Inflation is unpredictable, and advisers may need to consider alternatives to the standard asset classes.
One option is to give clients certainty and control by outsourcing the risk on income products to Momentum through a guaranteed annuity. This allows clients to convert a lump sum into a guaranteed income stream. The income can be linked to how long a client lives if it is a guaranteed life annuity. Or it can be a guaranteed term-certain annuity, which is an income stream for a specific period of time.
The yields on bond-type assets influence the income offered on all guaranteed annuities. We are currently in a high interest rate environment, which means that clients can lock in very attractive guaranteed annuity rates.
Momentum’s guaranteed term-certain annuity
A term-certain annuity pays a specified income for the term chosen. The income can be structured to stay level throughout the term or increase every year. Adding growth to the income helps to protect against inflation over time.
Clients who used R1 million to purchase a guaranteed annuity with a level of income in the first week of October 2023 achieved the following returns:
| Term in years | Monthly income before tax | Return before tax | % of income that is taxable |
| 5 | R40 600 | 8.4% | 18% |
| 10 | R26 585 | 10.6% | 37% |
| 20 | R21 080 | 11.9% | 60% |
Source: Momentum Investments, October 2023
The client only pays tax on the interest portion of the income.
If the client passes away during the term, we will pay the remaining income to the beneficiaries, who can choose to receive the remaining payments or convert them into a lump sum.
Momentum’s guaranteed life annuity
With a guaranteed life annuity, a client can convert a lump sum into an income stream that will be paid for as long as the client is alive. It is a very pure form of protecting income because the client is assured that they will never stop receiving an income during their lifetime.
The return a client receives depends on the income the client chooses and how long the client lives. The longer they live, the higher the return. To manage the downside risk of this, clients typically choose a guarantee term, which provides a floor that the return will never fall below.
For example, if a client aged 65 purchased a guaranteed life annuity with R2 million, with a guarantee term of 20 years, they could achieve the following profile in the first week of October 2023:
Clients can choose an increasing income to pass on some or all of the inflation risk to Momentum. The starting income will be lower initially, but the income could be higher over the longer term.
The most common use of a guaranteed life annuity is converting money from a retirement fund into an income stream. In this case, the full income amount is taxable. A guaranteed annuity can also be purchased with discretionary money to convert a lump sum into an income stream and transfer all longevity and investment risk to Momentum. In this case, a client only pays tax on the interest portion of the income from the annuity, so the return after tax is also very attractive.
The current environment is uncertain and volatile, but an upside to the high-interest rate environment is that guaranteed returns are attractive. Clients can pass the risk to Momentum so that their outcome remains certain over the longer term – just another way that Momentum gives clients personalised control through certainty.
For more information, speak to your Momentum consultant or go to momentum.co.za.