Annuity or ARF – Article 2 – Best of Both!
In our first article we started to explore the pros and cons of Annuities vs ARFs.
This week we will delve into a little more detail under the following headings:
- Certainty of Income
- Investment Risk
- Value for Money
1. Certainty of Income – an annuity provides for the greatest level of certainty of income as the insurance company commits to providing a fixed level of income for life. This kind of certainty allows retirees to plan their finances with confidence. An ARF is different, it allows an investor to drawdown anywhere from 4% to 100% of the fund value each year. If it is spent to quickly then you could have a situation whereby the ARF has ‘run out’ before the investors passes away, leaving them without income in later years. The ARF requires an understanding and detailed planning of what level of drawdown it can sustain in order to provide income for life.
2. Flexibility – once the decision to purchase an annuity is made, that’s it, you have your annuity for life. If an ARF is chosen it still allows an investor to convert the ARF to an annuity later.
3. Investment Risk – there is no investment risk with an annuity. There is investment risk with an ARF. ARF investment decisions should be made very carefully and in most cases conservative funds should be chosen. Provided conservative funds are chosen and the ARF is reviewed regularly with your Financial Advisor then investment risk can be minimized.
4. Inheritance – inheritance opportunities for annuities are very limited. Most annuities allow for a continuation of income, perhaps 50%, to a spouse in the event of the annuity holder passing away. However, in the event of death of an ARF holder, the full value of the ARF passes to his / her spouse. In the event of subsequent death of the spouse the full value of the ARF passes to his / her estate/ children etc.
5. Value for Money – this is possibly the hardest question. An annuity offers decent value for money if you plan on living a very long time. It’s fair to say if you purchase an annuity you would have to live to at least late 80’s in order to get back from the annuity payments what you purchased in the beginning. Your health is a key consideration. An ARF can be very good value for money provided it is well managed by you / your ARF Provider and your Financial Advisor.
Conclusion – it is fair to say that annuities are less attractive than they have been for many decades due to the poor annuity rates offered by many of the annuity providers in the market. This may change in the future. An ARF investment may be a prudent step for Mary as outlined in my previous article as it offers flexibility of income, attractive inheritance options in the event of her death and also the ability to convert her ARF to an Annuity at some point in the future, if either annuity rates become more attractive or if her own circumstances change.
Thanks for reading,
Michael Coburn BBS, QFA, FLIA, LCOI, RPA, SIA