Choose annuity to best suit needs

WHEN you get closer to retirement, thinking about how you're going to survive is crucial, and choosing the appropriate annuity is not a decision to take lightly.

● Living annuities are usually best for people with more money to invest – anything above R2-million.

With a living annuity you also have the option to decide where and how your money is invested. This gives you some autonomy in determining what to invest in, and the accompanying risks.

And risk is particularly important as you need to be aware of the implications of market movements, interest rates and inflation on your capital and income.

Before choosing a living annuity, weigh up your needs. Would you be comfortable with the value of your retirement savings fluctuating?

In terms of your income or the amount you will draw as a pension, you need to be aware of all the costs that come with a living annuity and how that will impact your capital – the money you have invested.

You are allowed to withdraw between 2.5% and 17.5% of your capital annually, with the option to change your income once a year.

● A guaranteed annuity income until you die.

However, if you die before your capital runs out, it does not go to your beneficiaries, but stays with the service provider.

It may appear unfair, but the service provider is taking a risk by guaranteeing you a consistent income, no matter how long you live.

The structure of a guaranteed annuity is rigid. Once you’ve chosen, you cannot change service providers.

There are two types of guaranteed annuities – traditional and with-profit annuities.

In terms of a traditional annuity, you can choose a level annuity – which means this monthly payment will stay the same for the rest of your life.

A fixed annual escalation annuity will increase each year by pre-agreed percentage.

The other option is a traditional annuity that with inflation.

In terms of a with-profit annuity, your income varies according to the profit or losses made.

Ask your financial planner about policies that offer a combination of living and guaranteed annuities.

DINEO TSAMELA

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