Planning for income post retirement

After 40 years of service as a teacher, my father has decided to retire at the end of this year. I can clearly see that the financial decisions at retirement are very daunting to him.

I believe that the main reason being, that after 40 years of service and ensuring sufficient retirement capital, his financial wellbeing for the rest of his life all comes down to one decision.

At retirement, you have the option between a Living Annuity, a Life Annuity or a combination of the two. I would like to shortly explain the difference between these options.

The Living Annuity is an investment product with the following features:

• The Investment risk rests firmly on the investor’s shoulders. Your capital will be dependent on market performance and therefore the risk exists that your capital can be depleted before death.
• You can decide how to invest your capital. Investment decisions like asset allocation and offshore diversification needs to be made.
• Your annual income draw-down must be at least 2.5% but no more than 17.5% of the annual value of the capital. This ensures income flexibility.
• Your heirs inherit whatever is left of your capital after your death.

A Life Annuity, also known as a Guaranteed Annuity has the following features:

• It is an insurance product that you purchase from a life insurance company.
• It guarantees to pay you a specified monthly pension for the rest of your life.
• You have NO investment risk or risk that your capital will be depleted before death.
• The drawback is that your capital dies with you, and no money passes onto your heirs

We regularly see that clients would base their decision only on leaving their heirs with capital, therefore making Living Annuities the most popular choice for most retirees. The implication of this has been that retiree’s capital are depleted before death and they become a financial burden for their children.

Recently financial institutions have made it possible to combine the two products, giving you the best of both, which I believe is a great solution for future retirees.

Heinrich Coomans | CA(SA) | CFP ® is a director at Affluence Group and spesialises in Investments, Personal and Business Insurance. For any questions please contact him at heinrich@afgroup.co.za or 084 586 9509.