I'm retiring soon - what are my options now?
So you're reaching retirement and will soon receive a pay-out from a retirement fund. But how do you make sure you will still have financial security and receive a regular income in retirement? Learn more about your options and their implications here.
Is retirement around the corner for you? You may have visions of long days lazing on the beach, or maybe you're counting down the months before you launch yourself into a new venture or passion project. Whatever your plans are, it's important to realise that even if you're no longer working full-time, it's still essential to save for an income.
When withdrawing from a retirement fund, like a preservation fund or pension fund, you're required by law to use a portion of your investment to buy an income-generating annuity. Here, you have some distinct options.
Life annuities - more certainty, but with limits
Life annuities are also called 'traditional' or 'fixed' annuities. They let you invest your money and then receive a guaranteed regular income for life. You can choose how you would like the income to be structured, such as by how much it grows each year. Discovery's Fixed Annuity is an example of this kind of annuity. Some life annuities, known as with-profit life annuities, guarantee an income and some exposure to investment growth.
Guaranteed annuities are insurance-type products, in that they insure you against potentially poor investment returns and the risk of outliving your retirement savings.
Knowing you're assured an income for the rest of your life offers great security, but remember that a life annuity ends as soon as you pass away. It's possible to link your spouse to the life annuity so that they will continue to receive an income if you pass away, but this comes at an extra cost. You can also choose to add a guaranteed term to your life annuity, which would mean the income would pay to your loved ones for at least a set number of years, but this also costs extra.
Other factors that can affect your monthly annuity income include your age. The younger you are at retirement, the lower your monthly income, as you'll likely need more money than someone who retires later in life. Gender can also play a role; because women generally live longer than men, they often receive a lower monthly pension than men.
Back-to-back annuities - certainty and life cover
Over the past few years, local markets have seen suppressed returns. This has led to the resurgence in popularity of retirement income products that guarantee an income for life plus capital protection. These products are often colloquially referred to as 'back-to-back' policies.
When you buy one of these policies, you're buying a life annuity and life cover. The Discovery Secured Capital Annuity is a back-to-back annuity that gives you a guaranteed income for the rest of your life and life cover equal to your initial capital investment, free of underwriting. You can also choose to receive 13th cheques for several years in your first years of retirement to cater for increased income needs, and have your income change over time at predefined rates as you age.
Living annuities - less certainty but more flexibility
Also called 'linked annuities', living annuities are more of an investment pool than an insurance product. When you retire, you can invest your accumulated savings in investment funds of your choice and draw an income from this that is not guaranteed. Discovery's Living Annuity is an example of this kind of investment.
When you invest in a living annuity, you can choose how often and how much money to take as an income, based on a predetermined minimum and maximum amount. Currently (2024) by law, you are required to withdraw between 2.5% and 17.5% each year from your living annuity, but you can choose how much and how often you receive an income.
How long this investment fund lasts depends on how much you withdraw and the performance of the funds that the capital is invested in.
The benefit of a living annuity is that you have a lot more flexibility in choosing the income you want to receive in retirement. This is important as your income needs may change in retirement, say in response to a change in your health. With a life annuity, by comparison, there is no flexibility to change your income should you need to.
Also, when you die, any money left over in your living annuity will pass to your loved ones. So, for clients who manage and invest their money well, your loved ones can be left with good inheritance.
The danger of this type of investment is that if you set the income level too high and withdraw too much, especially early on, you'll use up your money too quickly. This is especially true now, as medical innovation means that people are living longer. Also, if your investment funds do not perform well, this may result in your money depleting faster. Withdrawing more responsibly is crucial.
The Association for Savings and Investment South Africa (ASISA) recommends annual drawdown rates of 4% to 5% in the first decade of retirement and below 8% in the later retirement years.
It's best to seek financial advice
There are many options to choose from when retiring. A financial adviser who understands your personal situation, needs, and the options available will be able to help you choose what's best for you. That's why in situations like this, it's best to seek professional help.
This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. All life assurance products are underwritten by Discovery Life Ltd. Registration number: 1966/003901/06, a licensed life Insurer,an authorised financial service provider and registered credit provider, NCR Reg No. NCRCP3555. All boosts are offered through the insurer, Discovery Life Limited. The insurer reserves the right to review and change the qualifying requirements for boosts at any time. Product Rules, Terms and Conditions Apply
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