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BUSINESS NEWS AND VIDEO - When you reach retirement or are retrenched, you have important decisions to make about your pension, which will determine your lifestyle over the coming decades.
One of these decisions is: How do you invest your retirement savings to provide you with a sustainable income?
The following two options are available: A life annuity (guaranteed annuity) underwritten by a life insurance company, and a living annuity that is linked to the market.
Life annuities pay a guaranteed pension amount for as long as you live, irrespective of what happens in the market. In other words, the pension is linked to your life. You can buy a single-life annuity (i.e. only for yourself) or one that will also pay out to your spouse after your death.
The latter will always be a slightly smaller amount. Factors to consider when determining an income amount, are your life expectancy and the current interest rate in the market.
In a low interest rate cycle, you will receive a lower income for life. Income can remain unchanged or increase with inflation.
An advantage is that you know what you will get until your death, but then you sacrifice capital as you cannot bequeath it to someone. Another disadvantage of this product is that you cannot switch to a living annuity.
This type of annuity is suitable for a single person or someone who is risk-averse and wants to avoid volatility.
Costs are always an important consideration for any investment. For this product there is no monthly management fee, and the commission percentage can be negotiated, but is usually between 1% and 3%, paid upfront.
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Living annuities are also known as investment-linked annuities. You can decide in which underlying funds you want to invest your money and select an annual income percentage of between 2.5% and 17.5%. You can also nominate beneficiaries in the investment. On your death the beneficiaries have three options namely they can either continue with the living annuity in their name, take the full amount in cash or they can choose to combine these two options.
An advantage of this product is that it does not form part of your estate. A risk is that you can outlive your capital if the markets underperform, so there may be a capital risk. A living annuity can be switched to a life annuity at any time.
In other words, if at a later stage you want to avoid the risk of market volatility, you have the option to use a portion or all your capital to buy a guaranteed annuity.
A living annuity is suitable for individuals who want to protect their capital to live off it, and to bequeath it to their spouse and children.
Costs for this product include fund manager, platform and adviser fees. There are several platforms and funds available and these costs should always be compared to make an informed decision. There is also an option to use a share portfolio as an investment within the living annuity, which includes a portfolio manager cost.
An important advantage of this product is the freedom of choice as to how funds should be invested, and capital can be protected by offshore exposure.
PSG Silver Lakes Outeniqua recommends that you consider your financial situation and your risk appetite. Also ask yourself if you want to protect your capital and leave it to your beneficiaries or do you prefer a guaranteed income for life? Of course, you don’t have to choose between them – you can also have a combination of the two in your plan.
Feel free to contact us should you have any questions about these annuities.
Our office details in the Garden Route:
PSG Mossel Bay Diaz
Sioux Building
16 Sioux Street
Mossel Bay
PSG George Central
Dynarc House, 2nd Floor
31 Courtenay Street
George
The information in this document is provided as general information. It does not constitute financial, tax, legal or investment advice and the PSG Konsult Group of Companies does not guarantee its suitability or potential value. Since individual needs and risk profiles differ, we suggest you consult your qualified financial adviser, if needed. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.
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