As you approach retirement, you need to determine whether you can afford to retire with the savings you have accumulated and whether the pension you will receive will sustain you for the rest of your life.
Members of an employer’s pension or provident fund are allowed to postpone their retirement, even though they have reached the normal retirement age of the fund. Why would you want to defer your retirement? You could have a part-time job or contract work lined up for a few years, with the result that you won’t have to use your retirement funds, or you might not have accumulated enough money and have to save for longer in order to retire comfortably at a later age.
Once you do decide to start drawing an income from your retirement savings, you have two options: invest in a living annuity or buy a life annuity.
It is important to note that you can move your funds from a living annuity to a life annuity, but not the other way around, so once you’re in a life annuity, you cannot change your mind.
A living annuity gives you flexibility with regard to the income you can pay yourself. You have to choose a drawdown of between 2.5percent and 17.5percent a year, and most clients choose to be paid this income monthly.
You need to set up portfolios with your financial adviser where the money for the living annuity will be invested. It is important to set up the portfolios correctly and according to your specific needs. Some investors require conservative investments, while others want to grow their capital.
You must ensure that your living annuity will provide a sustainable income, and stick to the recommended drawdowns. Living annuities have market risk and the risk that you will outlive or deplete your capital, which has a direct impact on the amount of income you can pay yourself.
A living annuity is more flexible than a life annuity, as you can change your income drawdown once a year. You can nominate beneficiaries for a living annuity, allowing a legacy for the remaining capital in the investment.
Life annuities are suitable for clients who want to guarantee their income for the rest of their lives. You have an agreement with a life insurance company to “swop” your capital for monthly income payments for the rest of your life.
You have to decide whether you would like a single or joint life annuity. A single life annuity pays only for as long as you live, whereas a joint life annuity will pay until the death of your spouse, so if either of you die, the other will still receive an income. There is no longevity with life annuities, meaning that upon your death the life insurance company retains the capital.
You can leave a legacy to your heirs by adding guarantee terms to a life annuity. Guarantees protect you in the event of early death. If you added a guarantee term of, for example, 15 years and passed away in year five, your beneficiaries would be able to receive 10 more years of the fixed annuity income.
Life companies offer variations on life annuities, and these differ from company to company, so you need to find out exactly what you are buying.
Gerard Visser is an Alexander Forbes financial planning consultant.
PERSONAL FINANCE