Life annuity

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JayM

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Helping an elderly friend who unfortunately did not save enough for retirement. They are 72 with R1m sitting in a fixed deposit.

Any recommendations on a life annuity provider to generate a monthly income from this amount, and what sort of monthly income can be expected from R1m?
 
You cannot get a life annuity using after tax money. And frankly it would be a bad idea. Also anyone saying that you can get 7-12k per month is setting this person up for bankruptcy.

Rather look at an inflation linked RSA retail bond for this person. It will keep pace with inflation while paying an income twice a year.
 
Shayd said:
You cannot get a life annuity using after tax money.
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Yes you can. It's called a VPA.

What sets a person up for bankruptcy is attempting to go it alone taking the longevity risk into their own hands and having to determine drawdowns for themselves, instead of buying an annuity guaranteed for life.

At least whatever the level the insurer quotes is what you get and there's no temptation to eat too much capital.
 
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Shayd said:
Rather look at an inflation linked RSA retail bond for this person. It will keep pace with inflation while paying an income twice a year.
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So about R 3-5k/month. This makes sense if you want the capital perserved and don't really need the income, but if you're 72 with only R 1 million to live on you probably don't care about the capital outlasting you.

With this approach he will want to buy a new bond each year or so taking a portion of the capital to supplement the interest. This is what will risk bankruptsy if he gets it wrong.
 
Tomtomtom said:
So about R 3-5k/month. This makes sense if you want the capital perserved and don't really need the income, but if you're 72 with only R 1 million to live on you probably don't care about the capital outlasting you.

With this approach he will want to buy a new bond each year or so taking a portion of the capital to supplement the interest. This is what will risk bankruptsy if he gets it wrong.
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You can get a 10 year inflation linked bond at 5.25%

I think you are considering traditional bonds
 
Why would you want to buy a life annuity? Get the a fixed deposit with the best rate possible while the interest rates are high.

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Example from ABSA on a million that will be R7625 if my sums are correct. Only thing to consider is how inflation will eat into this. I am also sure you can do better than above from ABSA.
 
GrootVoet said:
Why would you want to buy a life annuity? Get the a fixed deposit with the best rate possible while the interest rates are high.

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Example from ABSA on a million that will be R7625 if my sums are correct. Only thing to consider is how inflation will eat into this. I am also sure you can do better than above from ABSA.
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Or just dump it into a simple money market with immediate access.

Around R6,800 pm, use what you need and let the rest grow the capital balance. Reassess if/when interest rates drop substantially.

Why hand over your full capital balance unless you're expecting to die before it runs out...
 
Mike Hoxbig said:
Or just dump it into a simple money market with immediate access.

Around R6,800 pm, use what you need and let the rest grow the capital balance. Reassess if/when interest rates drop substantially.

Why hand over your full capital balance unless you're expecting to die before it runs out...
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From what I understand, you can earn more from a life annuity than from interest on the same amount because in the case of a life annuity you essentially give the capital to the insurer and they benefit from it long after you die. The downside is that you then have nothing to pass down to your dependents.
 
deweyzeph said:
From what I understand, you can earn more from a life annuity than from interest on the same amount because in the case of a life annuity you essentially give the capital to the insurer and they benefit from it long after you die. The downside is that you then have nothing to pass down to your dependents.
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Exactly, you're sacrificing your capital for a short-term win. It only makes sense if you have no dependents.

Or you're really struggling to get by - and even then it's just kicking the can down the road and buying time. If you outlive it then you're worse off than where you started...
 
Mike Hoxbig said:
Exactly, you're sacrificing your capital for a short-term win. It only makes sense if you have no dependents.

Or you're really struggling to get by - and even then it's just kicking the can down the road and buying time. If you outlive it then you're worse off than where you started...
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I don't think you can outlive a life annuity. I think the point of it is that the insurance company pays you until you die. No doubt the amount they pay you is dependent on your age when you take it out and the amount. They essentially take a gamble on when you're going to die.
 
For people with less resources one wants the risk to be transferred to another party, in this case the annuity provider. Once one has enough resources it makes sense to assume some risk .. that approach has been modelled actuarially quite a bit.
 
Tomtomtom said:
Yes you can. It's called a VPA.

What sets a person up for bankruptcy is attempting to go it alone taking the longevity risk into their own hands and having to determine drawdowns for themselves, instead of buying an annuity guaranteed for life.

At least whatever the level the insurer quotes is what you get and there's no temptation to eat too much capital.
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Problem is, there is always risk. Even with some guaranteed product. There is company risk - you buy from some company you haven't heard of and in 4 years time they go under. There is inflation risk - you can choose inflation increases (and be surprised how much it drop compared to a fixed increase like 5%), but make no mistake, their inflation wont be your inflation. And the small print covers them against runaway inflation. With a bit of financial savvy or maybe a family member or friend to advise, I would rather try to manage the capital myself.
 
JayM said:
Helping an elderly friend who unfortunately did not save enough for retirement. They are 72 with R1m sitting in a fixed deposit.

Any recommendations on a life annuity provider to generate a monthly income from this amount, and what sort of monthly income can be expected from R1m?
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Stick it into RSA retail savings bond fixed % over 5 years (10.75%) - have the interest paid out monthly, and reinvest every 5.
 
Tomtomtom said:
So about R 3-5k/month. This makes sense if you want the capital perserved and don't really need the income, but if you're 72 with only R 1 million to live on you probably don't care about the capital outlasting you.

With this approach he will want to buy a new bond each year or so taking a portion of the capital to supplement the interest. This is what will risk bankruptsy if he gets it wrong.
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3-5k per month? Try 9k per month.
 
RSA Retail bonds. Over a certain age you can get monthly payments.
 
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