One would assume that all the life companies offer similar annuity rates. However, research shows that annuity income can vary dramatically between life companies which has a significant impact on your income during the period of your retirement.
According to a survey, conducted by Alexander Forbes Financial Services, the difference in annuity rates on a R1-million lump sum can differ by as much as R1Â 000 per month between life companies and these rates change on a weekly basis.
The provider that may have offered the best rate last month, could offer the worst rate this month — it all depends on their current exposure in the market and their view on interest rates.
The research was based on an annuity with a 3% annual escalation purchased with a R1-million lump sum and looked at various dates over the last three years.
The income gap between the best and worst rates averages at around R440 per month; however there are times when this gap widens significantly.
For example in August 2007 the life company offering the best annuity rate would have paid a monthly income of around R5Â 900 a month, while the life company with the worst rate would have paid out around R4Â 900 per month – R1Â 000 difference.
Once you have bought an annuity you are locked into that rate for life. Over a 20-year period at an escalation of 3% a year, that rate difference equates to R328Â 000 — or a third of your original lump sum.
In other words, the person who had bought the annuity with the best rate would have received over R300Â 000 more income than the person who bought the annuity with the worst rate.
In April 2009, the best rate at about R6Â 100 whilst the worst rate paid out R5Â 400 a month. Currently the difference between the rates is not as high as there is more consensus over where interest rates are headed, however retirees today face a far bleaker future.
Apart from the rate difference, the research also shows how dramatically annuity rates have fallen in general as interest rates hit their lowest levels in 30 years.
People retiring in 2008 would have been able to lock in monthly incomes of R7Â 000 a month for every R1-million invested, but today the best rate a person could expect on retirement would be around R4Â 300 per month. That is a 40% reduction in income.
If you are retiring soon make sure you get good advice. Now may not be the best time to buy an annuity at such low rates which you will be locked into for the rest of your life.
Also, make sure that you shop around and do not just to convert your retirement annuity or pension fund into a default annuity offered by your current service provider.
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