Living annuities are popular investment vehicles that offer flexibility to retirees. However these types of investments require frequent servicing, to ensure that capital is not eroded. In light of current market conditions, clients run a greater risk of capital erosion and advisers are encouraged to review all clients currently invested in linked life annuities.

Recent commentary in the financial media recommends that investors in living annuities take extreme caution, especially in the current market conditions.

This is based on the fact that, unlike life annuities issued by a life assurer which provide a guaranteed income for life, pensioners who elect to receive an income through a living annuity are exposed to three key risks:

• Longevity Risk: The risk of them outliving their capital (as there is no “pooling” of longevity risk with other pensioners), which will leave them without an income at some stage in their lives.
• Investment Risk: Pensioners who invest through a living annuity take the full investment risk, benefiting when returns are good but also seeing their “capital” reduce in periods of poor returns, which in turn impacts on the level of income they receive.
• Income variability risk: As the pensioner is bearing the investment risk in a living annuity, volatile investment returns from year to year means that their income from year to year is also volatile (assuming that they do not increase draw down rates to “adjust” for this impact which increases the risk that they will outlive their capital).

The income draw down rate selected on a living annuity, together with the investment performance of the underlying assets over time (and hence the asset allocation decisions made), are the two critical areas that need to be actively managed under a living annuity in order to mitigate these risks. I believe that in the current volatile markets, it is important for you to review these two areas to ensure that they remain appropriate.

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Our Financial planning process consists of the following:

• Identification of your financial goals and objectives.
• Collection of relevant information.
• Analysis of your current financial situation.
• Development of a full financial plan, together with options and recommendations
• Implementation of agreed recommendations
• A regular review of the financial plan either bi-annually, annually or as the circumstances require.