Understanding your pension options at retirement

Many pension, provident and retirement annuity members have to buy an annuity or monthly pension with their savings when they reach retirement.

Your retirement fund may offer you a default annuity that may be a good option, but may not always be the perfect fit for your circumstances. Understanding the options not only helps you make a wiser choice at retirement, but can also improve your pre-retirement planning.

In just a few minutes, this video will help you tell a guaranteed annuity from a living annuity, and the key things to think about when choosing between the two.  

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(full transcript)

If you want a lovely garden, you don’t bring in the trees - you plant the seeds. 

You know - that in time, and with the right conditions, the seeds will grow.  And over time, you will have all the fruit, flowers and shade you need.

Retirement savings are seeds, and just like plants, retirement savings differ.  You save in retirement annuities, provident funds, and pension funds and at retirement, you buy a regular income.

While these are all different plants, the process of bringing them into fruition is similar. 

You need the right conditions and time

Plant early enough to allow for good growth.  The earlier you start your retirement savings, the bigger and more fruitful your tree will be.

Make the right decisions for your specific circumstances

The choices you make on retirement are ones to consider carefully as they can affect how much income you will get and for how long.

When retirement arrives, you have some decisions to make.  This guide will help you understand your options.

• On retirement, you can take up to 1/3 of your savings as a lump sum.
• At least 2/3s must then be used to buy a pension.
• There are exceptions to this rule for savings made into provident funds before March 2021.

You can choose the type of pension from:-

1. A guaranteed (life) annuity
2. An investment-linked living annuity
3. A combination of the two

Only you will know your particular life circumstances and how much income you will need on retirement. So, it’s important to decide what to do according to your own specific needs.

A qualified financial advisor can be invaluable in helping you make the right choice. 

A)  A GUARANTEED (LIFE) ANNUITY

A guaranteed (life) annuity is a pension you are guaranteed to receive every month for the rest of your life.  The amount is typically determined according to

• your age,
• gender, and
• how much you have saved at retirement age.

You can decide on a level of increase year on year, from

• no increase at all
• an increase in line with a specific investment portfolio, or
• a fixed or inflation-linked increase.

You can choose a pension that pays for as long as you live or until both you and your life partner have died.

Things to know about this plan:

• Inflation can quickly erode your income if you opt for no increases. 
• When you die, your guaranteed annuity dies with you.
• Once you opt for this type of pension, you cannot change your mind.

B)  AN INVESTMENT-LINKED ANNUITY

You can choose underlying investments and draw a monthly pension from the performance of these investments.

You must draw regular amounts each month.  The amount must equal between 2,5 and 17,5% of your savings every year.

Things to know about this plan

• Your initial capital must be large enough to provide a monthly income and have enough buffer to be able to survive the markets’ fluctuations
• If markets erode too much of the capital rather than the growth, your drawings may kill off the tree.
• You must be careful of the percentage you take each month: If you start drawing a higher percentage and increase the pension you draw each year, you can reach 17,5% quite fast.  From then on, your income’s purchasing power declines, and you could outlive your savings.
• On the other hand, if your investments do well, you can draw out the income you need and leave something for your family when you pass on.
• A living annuity is flexible in that you can choose your investments, the level of your income, and to switch all or some of your savings to a guaranteed annuity at any stage.   

C)  BLENDED INVESTMENT-LINKED ANNUITY & GUARANTEED ANNUITY 

It may make sense to use a blend of both options.  This means you get a guaranteed life annuity AND the flexibility of an investment-linked annuity.

This way you get a regular income every month covering your essential needs AND  you can have some money that you can invest and hope to get better than expected returns from those investments.

Whatever you decide to do at retirement could depend on the type of seeds you plant today.

Plant away, knowing that when you need it most, you will have a whole orchard to choose from.