Know your retirement income options so you can make informed choices at retirement

When working people reach retirement age, they not only need to have accumulated enough money to live off their savings; it’s also important that they understand how that money will generate an income.

There are different types of annuity products to choose from, and with some, once a choice has been made, it cannot be undone.

Kamal Patel, Senior Financial Adviser at Old Mutual Personal Finance, says people entering retirement should thoroughly understand their annuity options, and this is best achieved with the help of a financial adviser.

“What you choose will depend on a number of factors, the most important of which are: how much you have saved, how long you expect to live in retirement, how comfortable you are with investment risk, and whether you would like to leave capital for your heirs,” he says.

Regarding savings in a retirement fund, such as a pension fund, provident fund, preservation fund, or retirement annuity (RA), there are certain rules that apply, Patel explains.

“If the fund value is more than R247 500, only one-third may be withdrawn as cash, of which the first R550 000 is tax-free. The remaining two-thirds must be used to purchase an annuity, which will provide you with a monthly income subject to tax,” he says.

Retirement income options
Patel says there are two basic types of annuities, although providers offer variations on each. “You don’t have to invest all your savings into one or the other, many people choose a combination of both,” he notes.

1. Life, or guaranteed, annuity
This is a pension bought with your savings from a life insurance company, where your monthly income is determined at inception and paid for life, the risk lies with the insurer. You may choose a level annuity or, at a lower initial income, opt for an annual escalation of, say, 5% to keep pace with inflation.

You can choose between a single-life annuity, where the income is paid to you for the duration of your life, or a joint and survivorship annuity, where the income continues to a second person (usually your spouse) after your death. However, choosing the latter option generally reduces your initial income.

The annuity may also include a guarantee period, which ensures that the income continues to be paid to a nominated beneficiary if you pass away within that period.

For example, if you select a 10-year guarantee period and live beyond the 10 years, the income will continue to be paid to you for as long as you live, but no further payments will be made to your beneficiaries after your death. However, if you pass away in year five, the income will continue to be paid to your nominated beneficiary for the remaining five years, ending at the conclusion of the 10-year guarantee period.

Another life or guaranteed annuity is a “with-profit” annuity, whereby your savings are invested in market-linked portfolios. The insurer will guarantee a minimum income, but any increases will depend on investment performance.

“It’s important to note that a life annuity is, literally, for life. You cannot opt out or transfer your savings to a different product once you’re in it,” Patel cautions.

“You also need to understand that, outside the guarantee period, there is typically nothing left over after your or your surviving spouse’s death”.

2. Living annuity
This is an investment portfolio where your income is derived from the returns generated by the underlying assets. You can choose from a range of funds on the provider’s platform, which are subject to fluctuations in the financial markets.

Once a year, on the anniversary of inception, you decide what percentage of your capital to withdraw as income, between 2.5% and 17.5%. However, the higher the percentage you withdraw, the faster your capital will deplete.

“In a living annuity, you take on the responsibility of ensuring that your pension lasts for life. It is therefore essential that you manage it with the ongoing guidance of a trusted financial adviser,” Patel says.

“An advantage of a living annuity is that you can transfer to another living annuity or to a life annuity at any time. In addition, any remaining capital still invested in the living annuity at the time of your death will be distributed to your beneficiaries, subject to certain conditions,” Patel adds.

As you approach retirement, take the time to review your income options carefully. The right annuity choice depends on your unique circumstances, including your income needs, health, lifestyle goals, and risk tolerance.

A life annuity can offer peace of mind and certainty through a guaranteed income, while living annuities offer flexibility and growth potential but also require active management.

A financial adviser can help you assess your circumstances, model different income scenarios, and put a plan in place that provides both confidence and stability throughout your retirement years.

Navigating the various retirement income options can be a daunting task, especially without the guidance of a financial adviser. The right advice can make all the difference. Taking the time to understand your options, together with a financial adviser, can help you protect your savings, preserve your lifestyle, and enjoy the retirement you’ve worked so hard to achieve.