Hybrid annuities originally offered retirees a way to buy an annuity that split their savings between an investment from which an income can be drawn and a guaranteed annuity.
They have since evolved and are now offered as the default annuity option by retirement funds, as guaranteed annuities with an investment portion or as living annuities with a secure income portfolio inside the living annuity on an investment platform.
Whichever one you consider, you need to know how the underlying investments work and whether you can switch between providers.
Older hybrid annuity products were offered as guaranteed annuities with part of your savings allocated to an investment portion. You could draw an income from these investments to supplement the guaranteed income.
Alternatively, you were offered a living annuity at retirement that converts into a guaranteed annuity later in your retirement.
The conversion is typically set to occur at a predetermined date, or when certain conditions arise. These conditions could include when rates on guaranteed annuities are good, or the provider finds you are unable to sustain a certain income level from your investments.
The guaranteed annuities used in these hybrid products have often been inflation-linked.
An inflation-linked guaranteed annuity typically gives you a lower monthly pension than a with-profit annuity, as the inflation-link gives you more certainty about the increases keeping up with inflation, while the with-profit annuity targets, but does not guarantee, an inflation-linked increase.
South Africa’s newer hybrid products give you more flexibility to choose when to switch from an investment-linked income to a guaranteed one, and often make use of a with-profit annuity or with-profit annuity portfolio to secure a guaranteed income.
They offer both annuities wrapped in a single product, with the flexibility to convert a portion of your savings from investments from which you are drawing an income to an annuity or portfolio that secures a guaranteed income at any stage after retirement.
This flexibility is useful because currently the Insurance Act only allows you to transfer:
- A living annuity issued by one insurer in its entirety to a living annuity with another insurer; or
- A living annuity issued by one insurer to a guaranteed annuity with another insurer.
- Part of a living annuity issued by one insurer to a guaranteed annuity with the same insurer.
A living annuity cannot, however, be split into more than one annuity if some of it will be transferred to another insurer.
This is problematic because most living annuities are provided on investment platforms and most of these businesses do not offer guaranteed annuities.
Newer hybrid products can be either:
- Offered by your retirement fund as an in-fund option;
- A guaranteed annuity; or
- A living annuity.
If the product is offered by your retirement fund, it is known as an in-fund annuity and must comply with the Pension Funds Act.
This means:
- The investment portion must comply with regulation 28 of the Pension Funds Act;
- When you die, the investment portion will be distributed in line with section 37C of the Pension Funds Act by the trustees to your dependants and nominees (Read more: What happens to my retirement savings if I die before retirement);
- The guaranteed annuity portion can be outsourced to an insurer or provided by the fund;
- The guaranteed annuity cannot be transferred to another provider;
- You benefit from institutional rates on the investment portion;
- You can transfer more of your investment portion to the guaranteed annuity after retirement;
- The amounts you draw as a pension will be set by the trustees of your fund, but are likely to be similar to those allowed on living annuities and may in future be subject to more restrictive limits set by the Financial Sector Conduct Authority (FSCA). The FSCA has published a draft conduct standard on living annuities that are offered as an annuity strategy within a fund.
The hybrid annuities that are currently offered with a guaranteed annuity structure have the following features:
- You can leave the investment portion as a legacy for your family;
- The products are not transferable to another provider;
- The annuity may be structured as:
- A traditional guaranteed annuity which pays an income and an investment portion from which you can draw additional income; or
- An investment portfolio from which you draw an income and participate in a pooled portfolio from which you are paid an income based on the survival rate of those in that pool. Survivors enjoy credits from the amounts left behind by those who die earlier (this is known as mortality credits). The income from the pooled portfolio is paid into and tops up the investment portfolio.
- The product provider can determine the minimum and maximum drawdown levels – they do not have to conform with the living annuity levels of 2.5% to 17.5%.
The hybrid annuities that are currently offered with a living annuity structure have the following features:
- Your investment will be made on an investment platform provided by a linked investment service provider (lisp);
- The annuity may be structured as:
- A living annuity on an investment platform on which one of the underlying investments is a guaranteed income portfolio. This portfolio operates like a with-profit annuity. Increases in the guaranteed income are based on the returns of a chosen portfolio;
- A living annuity with the option to participate in what is known as a longevity risk transfer mechanism. You agree to forfeit some of your capital when you die and in return a monthly income is paid into your living annuity portfolio. The mechanism is offered through a reinsurer which pools your risk with that of other annuitants and pays an income based on survival rates in that pool;
- In both cases, the guaranteed income will pay monthly into the cash portion of your portfolio;
- You must draw between 2.5% and 17.5% of the value of the portfolio as an income each year;
- Your adviser can earn fees on the investment in the guaranteed income portfolio, unless you agree that the adviser will not take a fee on this income;
- Your investment can be transferred from one provider to another as long as the new insurer can accept the guaranteed income portfolio structure;
- You either forfeit an agreed portion of your capital or the portion invested in the guaranteed income portfolio dies with you when you, or you and your life partner, die, depending on your choice. The balance in your living annuity investments can be left to your heirs.
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THREE TYPES OF HYBRID ANNUITIES
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In-fund |
Guaranteed annuity |
Living annuity |
| How does it work? |
The fund invests part of your savings in your chosen investments and you draw an income from that.
For the guaranteed income, the fund can:
- Take a portion of your savings into the fund and pay a guaranteed income from the fund until you die; or
- Use a portion of your savings to buy a guaranteed annuity from an insurer for you.
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There are two ways in which this annuity can operate:
Option 1:
The provider gives you a guaranteed annuity in return for part of your savings.
The other part is invested in investments you choose on a platform. You draw additional income from these investments that is combined with the guaranteed annuity and paid to you as an income.
Option 2:
You participate in a pooled investment with other annuitants. A guaranteed income is paid from this and survivors benefit from the savings of those who die earlier. The income is paid into the cash allocation in the investment portion.
The investment portion is invested in line with your choice and you draw an income from it.
The other part is invested in investments you choose on a platform. You draw an income from these investments.
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There are two ways in which this annuity can operate:
Option 1:
You can choose your own investments on a platform that includes the option to invest in a lifetime income portfolio that provides a guaranteed income in the same way as a guaranteed with-profit annuity.
Option2:
You choose your own investments on an investment platform but agree to forfeit a portion of your savings on death. This is used to reinsure you for an income for life. This income pays regularly into your cash allocation on the platform. You draw an income from the investments.
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| Must the investments be in line with regulation 28 of the Pension Funds Act? |
Yes
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No
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No
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| What are the drawdown rates? |
The fund can decide on the drawdown, but there is a draft conduct standard suggesting drawdown rates for in-fund annuities that may be put in place in future. |
The provider can decide the drawdown rates that are allowed.
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The drawdown rates must be between 2.5% and 17.5% of your savings each year.
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| Can you switch more to the guaranteed annuity post retirement? |
Yes |
Yes |
Yes |
| Can you switch to another provider? |
No |
No |
Yes, but the new provider must be able to accept the guaranteed income portion. |
| Can you leave the remaining capital to your heirs? |
Yes, any remaining portion of the investments but the trustees will decide on a fair distribution between your dependants or, if you do not have dependants, to any one you nominated.
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Yes, but not the guaranteed income. It dies with you unless you have bought the income for a guaranteed period. |
Yes, but not the guaranteed income. It dies with you unless you have bought the income for a guaranteed period. |
