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CityPress - - Business -

Illa

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.

En­hanced an­nu­ities

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