Hybrid annuities: Some of the choices
The choice of hybrid annuities is growing all the time. They offer a number of choices combining investment-linked living annuities (living annuity, or illa) with one of the underlying choices being a guaranteed annuity and a with-profit smoothed or stable guaranteed annuity.
The most favoured combination of a hybrid pension is a with-profit annuity to provide the guaranteed income that should be sustainable for as long as you live. The main difference relates to how future increases on your pension are determined.
With a normal guaranteed annuity, you get as a pension what a life company offers you with future increases specified as either a fixed % increase or as a % of the change in the official inflation rates.
The main features of a with-profit annuity are:
Your income is guaranteed for life. This includes your starting income and every annual increase, relating to investment returns.
Annual increases are linked to the smoothed returns of a balanced fund investment portfolio (usually 60-70% invested in equities, with returns smoothed over 5 to 6 years). There may be positive or negative adjustments, usually small, if longevity or credit risk experience is different to the best estimate basis used by the insurer.
Your increase can never be less than zero.
While there is a range of options available, many of the legislated pension defaults being put in place by retirement funds are using living annuities, with profit annuities or combinations within the hybrid annuity.
A fair number of asset managers and retirement fund administrators, including the biggest administrator, Alexander Forbes, are using a comparatively new company, Just SA, which specialises in retirement income products with its with-profit annuities as one of the underlying choices for a hybrid living annuity.
In the case of hybrids, many companies are choosing Just SA to provide the with-profit annuity as one of the portfolios within a living annuity.
Other bigger life assurance companies are using their own with-profit structures in combination with living annuities.
The main reason for choosing Just SA seems to be that much of the secrecy has been removed by the company. The increases and investments used by Just SA make use of predetermined formulas and are not wound up in any secrecy.
Alexander Forbes head of research John Anderson, says that the Just SA offering is one of the best choices available, particularly with its use of open formulas on how its bonuses (pension increases) are determined. Among other things, he says, the basis of increases for pensioners are more predictable.
The Professional Provident Society (PPS), which aims its products at graduated professionals, is using Just SA for the with-profit annuity choice within its normal living annuity as well as its default annuity.
Others include Sygnia Asset Managers.
Chief executive of Just SA, Deane Moore, says future increases in your pension are transparently linked to a publicly quoted balanced fund. There may be positive or negative adjustments, usually small, if longevity or credit risk experience is different to Just’s best estimate basis, but every adjustment is audited by an independent company. The cumulative adjustments made to date have been positive.
Moore says before investing a pensioner should talk to a financial adviser, who will tell you about such things as drawdown rates and the annuity rate from Just SA.