Approaching your retirement date and making all the decisions on income vehicles and investments choices can be quite daunting.
As this point I want to start with, please just get qaulified independent advice. Depending on your choice of prodcut, you might only have a single shot at this, so make it count. Don’t make a forced decision on your retirement income unless you have sufficient information and have a fair degree of conviction and comfort. Clients who consult us for retirement advice will all too often present us with retirement options presented to them by their employer or employer’s retirement fund provider. Proposals which is often not longer than a one pager. This blatant lack of transparancy just shocks me every single time.
It is then expected of the clients to make an informed retirement income decision with their hard earned retirement savings that must last them 25-30 years, without really understanding all the implications. Here are some of the options you have at retirement, assuming that we are dealing with retirement capital only. If you don’t need at this point, you could preserve you retirement funds with or without contributions. The amount of time until your planned retirement, and investment fees are crucial with this decision.
If you need a retirement income, you could choose between a life or guaranteed annuity, a living annuity, or a combination of the two options. You can always convert your living annuity into a life annuity but not the other way around.
Life or guarenteed annuities
Should you choose a life or gaurenteed annuity, you will give away your capital to the annuity provider and they will provide you with a guarenteed income every year untill your passing. You could ad a guarenteed period for instance 10 years, that is how long the guarenteed income will be paid irrispective if you pass away earlier. You could also elect that your spouse continue with your income or a reduced income amount untill their passing, but these options will reduce your starting income.
Life annuities is for all practical purposes an insurance policy. Your age and health are factors that insurers consider when determining the income amount that they will provide you in exchange for your capital. With life annuities you can choose a zero-income increase, a fixed annual increase or a market linked increase. Each with their own consequences. Your biggest risk factor with annual income increases is inflation. If the negative effect of inflation is not absorbed, you are bound to lose serious buying power as your retirement years continue. Once you made a choice on a life annuity option you can never change it again.
Living annuities remains your retirement asset, that you and your advisor will have to make important decisions with regards to the investment assets and risks you need to take to achieve your desired outcome. The market performance of the underlying assets and fees will mainly determine your capital growth and income over time. This remains a long-term investment and being too conservative on investment asset choices will hurt you in your later years. You can annually draw between 2.5% and 17,5% of your capital as an income. However, depending on your investment assets, drawing anything more than 6% could become problematic over time, depending on investment returns and inflation. Whatever capital is still available on your passing can be inherited by your spouse, children and beneficiaries, but inheritance should not be your main reason for choosing a living annuity. Your own quality of life during retirement should take preference over any possible inheritance.
A benefit of living annuities is you can invest up to 100% of your funds into offshore assets and you can also combine life and living annuities if the need exist. These are very important life changing decisions, take your time, weigh up different options and opinions, get enough information and please consult a professional.
Jacques Hodsdon – MCom Tax | CA(SA) | CFP ® is a Director of Affluence Group and specialises in Investments, Personal and Business planning. For enquiries contact, email@example.com or 013 752 6566