By Paul Truscott
If you’re one of the many South Africans approaching retirement and have to decide what to do with your retirement savings, you may find that making this decision based purely on facts and logic is next to impossible.
We get it. Retirement engenders a roller coaster of emotions that is often hard to ignore.
Add to this the need to decide how you’ll invest your retirement savings to ensure it will last your lifetime, and possibly your partner’s too, and it’s no wonder many people feel overwhelmed.
At retirement, you’re allowed to take a third of your savings as cash. The other two-thirds must be invested in a financial product, such as a life annuity or a living annuity, that generates an income.
With a life annuity, you’re essentially buying an insurance policy that pays you a certain pension for the rest of your life. The ability to provide an income to your loved ones after death is an optional extra.
A living annuity is an investment product. You get a say in how your capital is invested, and in how much of it you take as an income each year, within certain regulatory limits. Any capital that remains will automatically be bequeathed to your loved ones after your death.
While having a say in how your living annuity is invested sounds great, the problem is that retiring doesn’t mean you’re suddenly qualified to manage an optimal investment portfolio that delivers a sustainable income and protects you against inflation, for life!
You may also not be equipped for the uncertainty that occurs when your investment experiences periods of good returns and periods of bad returns, which will affect your income.
It’s generally accepted that you should not draw down more than 4% of your capital a year in retirement. But our research shows that many South African living annuitants are drawing down significantly higher than that – on average 8–9%.
When you add this to the fact that people are living longer and inflation has been increasing, living annuitants are at a higher risk of outliving their savings than ever before.
For this and other reasons, guaranteed life annuities have made a comeback over the past few years. With a life annuity you effectively trade your retirement savings for a monthly income for the rest of your life, no matter how long you live.
The amount of income you receive is determined by the life insurance company, and depends mostly on your retirement savings, your age, and your sex.
But handing over your life savings can be an emotional decision, as once your money is dedicated to generating an income for life, you can’t change your mind. This can be a hard pill for some to swallow.
Keep calm with a blended annuity
Fortunately, there’s a solution to help keep you on an even emotional keel.
A ‘blended’ annuity provides the benefits of a living annuity and a life annuity in one. It consists of a flexible portion, from which you can increase or decrease your income (within regulation) as well as a guaranteed portion that gives you a safety net – a level of income that you’ll be paid for as long as you live.
You can also leave something for your spouse, partner or children, depending on which option you choose.
Yes, retiring and choosing a retirement product to give you an income, on top of all the other decisions you make during this transition, can be emotionally draining.
But rest assured there is an option that can give you the best of both worlds – certainty and flexibility – when it comes to managing your financial resources in your golden years. And speaking to a financial adviser is key when making such important decisions.
Paul Truscott, Business Development Manager, Just SA
*The views expressed here are not necessarily those of IOL or of title sites.
IOL Business