Choosing your retirement income

Although you are able to transfer from a living annuity to a guaranteed annuity (or to a different living annuity), the decision to invest in a guaranteed annuity is final and no transfers out of the product are allowed. Investors, with the assistance of a financial intermediary where needed, should therefore consider their retirement strategies carefully. The following factors should be taken into account:

Income from your annuity

A guaranteed annuity will provide a stipulated income for the rest of your life, based on prevailing interest rates. Currently, the highest published guaranteed rate is 9.2% per annum on R100 000.If you retired with R100 000 today, you would therefore receive R9201 per year (or R767 per month) until your death. Logic dictates that when interest rates are high you will receive a higher income. However, economics indicate that higher interest rates also correspond with higher inflation rates, which means that the real value of a higher income (after the impact of inflation) may not be that much greater.

With a living annuity, you determine your income by choosing to draw between 2.5% and 17.5% of your investment value annually. (You can amend your income rate every year on the anniversary date of your investment.) By keeping the amount and frequency of your income payments as low as you can, you can ensure that your savings last you for longer. Equally important is ensuring that you have made appropriate unit trust selections, which, depending on your personal risk profile, will aim to promote continued growth in your investment. A key benefit of a living annuity is that you have the option to adjust your income level and portfolio make-up when market conditions change.

However, it is important to emphasise that income payments are not guaranteed, as these are taken out of your investment capital. Your income is, therefore, directly dependent on the performance of the unit trusts you have selected as underlying investments.

Product fees

When taking out a guaranteed annuity, you may choose whether or not to seek the assistance of a financial intermediary, to whom you would pay a negotiable initial advice fee. The fees related to the annuity itself are embedded within the product. These fees will be taken into account when determining your income payment, so the income you receive is nett of fees.

When taking out a living annuity, you may need to pay three parties: your financial advisor (this is a negotiable fee), the party responsible for the administration of your investment and the asset manager(s) of the unit trusts you select. The higher your ongoing fees, the lower the effective growth rate within your product. It is, therefore, important to invest with a product provider that offers a favourable fee structure.

Residual value of the annuity

Simply put, in a guaranteed annuity there is no value at death. As the insurer who offers your policy bears the risk that you might live for a long time after retirement, it also keeps any residual assets if you die shortly after retiring.

In a living annuity, the residual value of your capital upon your death is payable to your elected beneficiaries. Although this may not be your primary objective when investing your post-retirement savings, it means that living annuities may, if managed efficiently, have enduring value to your beneficiaries.

It is clear that both types of annuities have a place in the market: For investors who value certainty and would prefer to take on only very slight risk exposure (even if at the expense of potentially greater returns), a guaranteed annuity may be the more appropriate alternative. However, for inventors who wish to exercise more control over their savings and seek the potential to generate further investment returns (even at potentially higher levels of risk and involving greater individual responsibility), a living annuity may be most suitable solution. It is, therefore, very important to obtain appropriate financial advice to ensure that your post-retirement investments best suit your risk profile and requirements.