Comparing the Life Annuity and LIF
This isn’t so much about getting exactly what you want. Most of the time, as in the examples just presented, what you want does not exist. It is more about deciding what it is you are prepared to give up. If you want the guarantees of the annuity option, you are going to give up the flexibility that the LIF will provide. If you want the flexibility of the LIF, you are going to give up the guarantees that come with the annuity.
The Income that Can Be Generated
The first point of comparison is the amount of income that can be withdrawn from a LIF and the income offered by the pension plan (annuity). Often, the pension plan will provide a higher initial income, especially for a single life annuity. A single life annuity for Jack, guaranteed for 10 years (pension option 2), paid $2,643 monthly. It is important to remember that the pension plan income is an annuity which, by design, is a principal encroachment vehicle. This becomes evident when you compare the asset/ estate value of the different options as shown in the next comparison.
The pension option Jack favoured (option 9) delivered a guaranteed monthly income of $2,259 for as long as either he or Diane were living. As you can see from Table 6.4
, the LIF for Jack would pay an initial monthly income of $2,460. The amount of income provided by the LIF at a 5 per cent investment return exceeds the amount of pension income until age 80, at which time it starts to decline. The pension income, ...