hen you retire, you have to choose what type of annuity product you want to use. Your choices are: an investment-linked living annuity (Illa), a guaranteed annuity, or the lesser-known choice – an enhanced annuity.
An Illa is the most popular choice by investors for the simple reason that it offers them flexibility.
Youri Dolya, best practice leader at Alexander Forbes’ retail unit, says your best course of action would be to sit with a qualified financial adviser and be reasonable about your income expectations in retirement. For example, if you have saved up R800 000 but want to buy an annuity product worth R1 million, you are 20% short to start off with.
“You spend up to 40 years of your working life saving for retirement, but it doesn’t end there. Once you are retired, the onus is on you to keep track of your finances each year,” he says.
Dolya says that, more often than not, retirement savings will be the largest pot of money an investor has access to in his or her lifetime.
“People become complacent because their accumulated savings are so large, relative to their income, that they cannot foresee the money running out.”
However, he notes that an Illa, for example, is a relatively expensive product in terms of how much capital you have saved, relative to the monthly annuity you are able to buy.
But before we go into costs, let’s look at what you get for each type of annuity.
Illa provides you with a variable income in retirement. One of the key attractions for retirees is that you get to decide how much money you want to receive on an annual basis, or draw down, and you also have a say in how your money is invested. Each year, when you meet with your financial adviser, you can choose what percentage of your retirement funds you want to access for the rest of the year, and the range is anything from 2.5% to a maximum of 17.5%. The big risk is that if you draw down too much money, you face running out of funds before your retirement years have ended, ie, before you die.
A second benefit many pensioners use to justify their choice of an Illa is that if they die before their retirement savings have run out, the money that is left will go to their nominated beneficiaries.
Guaranteed life annuity
This product offers to pay you a fixed monthly pension in your retirement years. Dolya recommends that if your retirement savings are worth R1.5 million or less, you should buy a life annuity. You can also opt for a with-profit annuity, which is the same as a guaranteed annuity, but it increases each year in line with inflation.
You can buy a life annuity with a guaranteed period of anything from five to 10 or 15 years. If you die within the guarantee period, the product will continue to pay an annuity to your estate or your nominated beneficiaries for the remainder of the guarantee period.
If you continue to live beyond the guarantee period – for example, 20 years – the product will continue to pay you the agreed annuity, but will not continue payments to your beneficiary when you die.