A Guaranteed annuity is a retirement product you buy post retirement with money you have saved up in your pension/preservation fund or retirement annuity fund. It is an insurance product and in no way linked to the financial markets. The best way to describe the product is to say you buy an income stream.
The insurance company where you place the policy takes on your longevity risk. They look at your age (mostly) and then quote you a once of lumpsum for an income stream. This income can come in different forms, it can increase every year with inflation and it can continue until the day you (and your spouse if applicable) pass away. This product is designed to give the policy holder peace of mind that he/she will not outlive their money. On the other side the policy holder have no option to bequeath any monies to a beneficiary, the only thing you can do is, you can place a max 10 year guaranteed term on the policy. If you pass away in the first 10 years, you can bequeath the remaining income streams to a beneficiary. If no guaranteed term and the policyholder(s) die soon after taking out the policy, the policy ends without any lumpsum payments being due from the insurer. This policy is designed for peace of mind, but a retiree should not invest 100% of his/her money into this product. It is ideal to look at your budget at retirement and determine what is your fixed costs every month and take out a guaranteed annuity that will secure that amount of income. Then the rest can go into a living annuity (as per my previous article) in order to preserve some capital for generational wealth.
There are a lot of options when taking out a guaranteed annuity. The older you are when taking out the product, the less you have to pay for a certain income stream. You can choose to insure another life (for example a spouse) , you can choose to increase your income every year with inflation, a fixed percentage. You can also allow the income to reduce to 75/50% if the main life insured pass away.
The policy holder should see the product as an insurance product, where he/she pays a once of premium to purchase an income stream. Great care should be taken in order to ensure that informed decisions is made when taking out the policy as a policy holder cannot make any changes after a policy issued. That is why you need an advisor.
The once off lump sum amounts that insurers charge for these types of policies can easily run into the millions, if you need a decent amount of income. It is of upmost importance that you start saving early and you do not stop premiums pre retirement unless you absolutely have no other choice. The more money you have available at retirement, the more flexibility you have.
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