Reaching retirement can be a bit of a daunting experience, especially if you aren’t fully informed of your different options at retirement, as well as their respective advantages and disadvantages.
At retirement, retirees can access up to one-third of their retirement savings in the form of a cash lump sum. However, they will need to invest the balance of two-thirds into an annuity, which is ultimately a financial product that provides a regular income to the product owner, during their retirement.
The two types of annuities are: 1) living annuity, and 2) life annuity. These are the basics to take note of:
One of the main advantages of a living annuity is that it provides flexibility. Each year the investor can choose an annual income drawdown percentage of between 2.5% and 17.5%. The drawdown selected will be paid according to the investor’s preferred income frequency (which can be monthly, quarterly, twice a year, or once-off during the year). Another important consideration is that each year, the investor can adjust either the income drawdown percentage, the income frequency, or both.
Another advantage of living annuities is that they allow for having the remaining capital paid out to nominated beneficiaries when the investor dies, or to their estate in the case that no beneficiaries are nominated.
However, the main disadvantage is the risk of depleting the retirement funds before the investor dies. Therefore, it is extremely important to live within your means and not withdraw too much. Performance of markets can, of course, also have an impact on the period of time that the living annuity lasts. Thus, it would be advisable to invest your living annuity wisely, with an investment professional who can assist you with reaching your retirement goals.
A life annuity provides a pre-determined monthly income, for the rest of the investor’s life. A life annuity is a good option for those who are anxious that their retirement savings may be depleted prematurely, or if they seek comfort by having a guaranteed income for the rest of their lives.
The income provided may either be a fixed rand amount, or an amount that increases with inflation each year. One of the issues with a life annuity is that the income is fixed/pre-determined, thus there is no flexibility offered. However, the main risk is that should you pass away, the money dies with you – effectively meaning there is no remaining capital to leave to your beneficiaries or estate.
Every investor has a different set of circumstances, It is, therefore, advisable to consult with an experienced, qualified advisor to make fully understand the options best suited to their personal circumstances and retirement plan.