Question

I have some questions about Life Annuities – the answer to which would probably be very helpful to other people considering the same decisions.

Is it better to take a Life Annuity with a higher initial payout, but no escalation in the premium, or to take a Life Annuity with a lower initial payout but with an annual escalation? 

Answer

This is a very real danger.  Over the past year I have come across two structures where a person would have run out of money within 10 years because of poor advice following the death of a spouse.

It is important that you as a couple understand the state of your finances and have a documented plan on where your income streams are going to be coming from. I would recommend that you do the following:

• Document your finances

Make a list of all your investments with the current values.  List also the various income streams that you have.  Share these with your spouse so that he or she knows what you have and what you are living on.

• Appoint a financial planner

Find a financial planner who is knowledgeable and whom you and your spouse feel comfortable with.  Ask your friends for recommendations.  You can also find a Certified Financial Planner on the Financial Planning Institute’s website (fpimymoney123.co.za/find-a-financial-planner). 

A Certified Financial Planner has to abide by a code of ethics and demonstrate competence by achieving a much higher level of Continuing Professional Development hours than a regular financial planner needs. 

Once you have a shortlist of planners, ask them for references of people they advised – ideally from a client who has lost a spouse.  It is important that this selection process be thorough as you will be entrusting your future finances to them.  You need to find someone who is competent, caring and ethical.

• Have a detailed financial plan drawn up

Once you have appointed a financial planner, you would need to get a financial plan drawn up. This financial plan would look at all the investments and income streams that you have.  It would indicate the level of return that would be needed for your income to be sustainable for the rest of your and your spouse’s lives. 

This plan should be reviewed each year to check that the returns needed for the plan to be successful have indeed been achieved.

• Family meeting

If you feel comfortable doing this, you should call a family meeting where your financial planner goes through your financial arrangements.  I often hold these family meetings over Zoom or Teams as many of the children live overseas.

The advantage of doing this is that the children understand your financial setup and feel comfortable with the quality of advice that you are getting.

Financial planning is very important and is especially needed as you get older where the consequences of making a mistake can be significant. It is therefore really important that you invest some time in partnering with someone we can help you make the best decisions going forward.