JOHANNESBURG - There are a number of important financial decisions you need to make when you retire. They are:
1. What financial options do I have when I reach retirement age as stipulated by my employer?
You no longer have to retire from your retirement fund when you retire from the service of your employer and start earning a pension immediately; you may elect to retire from the fund after normal retirement age as set out in your fund’s rules. This means that you will retire from your employer at your normal retirement age, but you can keep your retirement savings invested in the employer’s fund until you choose to receive the money that you have invested during your working lifetime.
You can elect to defer your benefit in your current employer’s fund on retirement, but you won’t be able to make any further contributions to the fund. This is what you should consider when deferring your benefit:
- Decide on the date you want to collect your retirement savings from the fund.
- You won’t be covered for the fund’s insured benefits.
- Your retirement savings will stay invested in the fund and you will remain invested in the investment portfolio you were invested in at retirement date.
- You will continue to have the same range of investment choice.
- There will still be investment fees and administration costs.
- Positive and negative investment returns will be added to, or deducted from, your investment in the fund until your deferral date.
If you choose to defer outside of the fund by using personal retirement annuity (RA) funds, you can also elect to make additional contributions. This will allow you to build on the savings already accumulated.
2. To what type of retirement fund do I belong?
Find out what type of fund you belong to, as this has an impact on how much cash you are allowed to take when you elect to retire. Any cash taken from a retirement fund is subject to income tax.
If you belong to a provident fund, the following options are available to you:
- You can use all your money to buy a pension;
- You can use some of your fund credit as cash and use the balance to buy a pension; or
- You can take your full fund credit as cash.
If you belong to a pension fund or an RA fund:
- You can use all your money to buy a pension;
- You must use at least two-thirds of your fund credit to buy a pension; and
- You can take up to one-third of your fund credit as cash.
3. What pension options are available in the market?
A pension, or annuity, is paid to you once you decide to retire. This annuity can be received monthly, but you may elect to receive it semi-annually or annually.
Guaranteed, or life, annuities pay you a pension for the rest of your life and there is no risk associated with poor market returns, because the company from which you purchased your guaranteed annuity assumes this risk.
The amount and frequency of the payment chosen at onset remains fixed throughout the lifespan of the annuitant, and unless you choose a guaranteed annuity that has some sort of inflation protection, your buying power will reduce significantly over the years, and in the case of a level annuity, the amount of income at the beginning of the annuity remains fixed. There are, however, a myriad different guaranteed annuities, and it is wise to find out about strengths and weaknesses of each.
Living annuities are more flexible, because you can draw between 2.5% and 17.5% a year and you can change the percentage and draw date of your pension on an annual basis. The downside, however, is that you are still invested in the market and assume the risk associated with poor market returns over time, and the reality of being invested in this kind of annuity is that, potentially, you may run out of money if you draw too much too soon.
There is no “one size fits all” solution when it comes to making financial decisions at retirement, particularly given the multitude of changes to legislation in the industry in recent times. You need to develop a financial roadmap in consultation with an accredited adviser and make financial decisions that count in your favour.
Gary Fisher is a Certified Financial Planner and is the head of Member Education Services at Alexander Forbes.
The views expressed here are not necessarily those of Independent Media.
PERSONAL FINANCE