Evolutionary Awards – Momentum Investments
The Evolutionary Entries.
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from 4-8 November.
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Directory
Category: Evolution in member outcomes
Describe your evolution:
Using a hybrid annuity to enhance income sustainability for clients.
When considering a living annuity, most investment strategies are based on the premise of taking enough risk, so the expected returns are at a high enough level to sustain the required income up to the client’s life expectancy. In addition, risk is mitigated to some extent, by investing efficiently by means of a diversified portfolio, one that is exposed to the local and global asset classes of cash, bonds, property and equities.
Yet, with these strategies, the primary retirement risks remain, namely market risk and longevity risk.
A life annuity, on the contrary, has no exposure to market risk and longevity risk but it provides an inflexible income stream with no market participation.
A living annuity with a life annuity as an asset class, can address the short comings of both living and life annuities and provide a better diversified portfolio that aims to hedge the primary retirement risks.
This is shown in my research paper (and presentation) that starts with the benefits of diversification and what a good outcome could be for a retiree.
It when examines how risks transpire in living annuities and establishes the link between longevity risk and the additional required return to offset this risk. This is followed by a detailed case study that examines market and longevity risk over a range of simulated market circumstances, with and without a life annuity.
This all leads to the conclusion that the required income from a living annuity to maintain a reasonable standard of living can be extended by as much as a decade and even longer by adding a life annuity as an asset class as it hedges the primary retirement income risks.
Describe the impact your evolution has had in response to its identified challenges and targeted outcomes.
This is still early days for our product, and the benefits will only be seen in the long run, but we have built an income illustrator that helps financial advisers blend the hybrid annuity in an optimal manner to reduce the key retirement risks.
