Difference Between a Living Annuity and a Life Annuity

When it comes to retirement planning, there are several options available to retirees. Two of the most common options are living annuities and life annuities. Both provide a steady income stream during retirement, but they differ in several important ways. In this blog post, we will explore the key differences between a living annuity and a life annuity.

Living Annuity

A living annuity is a type of retirement income product that allows retirees to draw a regular income from their retirement savings while the capital remains invested. The amount of income you receive from a living annuity is determined by the performance of the underlying investment portfolio, and you can adjust your income payments within certain limits. The withdrawal amounts typically range between 2.5% and 17.5% of the capital invested, depending on your age and other factors.

The primary advantage of a living annuity is that it offers flexibility and control over your retirement income. You have the freedom to choose how much income you receive and how your investment portfolio is managed. However, this flexibility also means that the income payments are not guaranteed and could fluctuate depending on the performance of your investments. It is important to note that withdrawing too much from a living annuity could lead to the capital being depleted too quickly, which is why it is recommended to seek advice from a financial advisor before making any major decisions.

Life Annuity

A life annuity, on the other hand, is a type of retirement income product that guarantees a fixed income payment for the rest of your life. When you purchase a life annuity, you are essentially buying an insurance policy that pays you a regular income in exchange for a lump sum payment.

The primary advantage of a life annuity is that it provides a stable and predictable income stream for the rest of your life, regardless of how long you live or how the investment markets perform. However, the downside is that you have less flexibility and control over your retirement income once you have purchased a life annuity.

Key Differences

The key differences between a living annuity and a life annuity can be summarized as follows:

1. Flexibility: Living annuities offer more flexibility and control over your retirement income, whereas life annuities offer less flexibility but more certainty.

2. Investment risk: With a living annuity, you bear the investment risk, whereas with a life annuity, the insurer bears the investment risk.

3. Death benefits: With a living annuity, you can leave any remaining capital to your beneficiaries when you die, whereas with a life annuity, the income payments stop when you die, unless you have opted for a guaranteed period or a joint-life annuity.

4. Cost: Living annuities tend to be less expensive than life annuities, as there are no insurer profits and lower administration costs.

Conclusion

Choosing between a living annuity and a life annuity ultimately depends on your individual circumstances and retirement goals. If you value flexibility and control over your retirement income and are willing to accept investment risk, then a living annuity may be the better option for you. If, on the other hand, you value a guaranteed and predictable income stream for the rest of your life and are willing to sacrifice some flexibility, then a life annuity may be the better option. It's always a good idea to consult with a financial advisor to determine which option is best for your specific situation.