By Braam Bredenkamp – Financial Advisor at GraySwan
It’s a tough time to think about retiring. With local inflation reaching a 13-year high in mid-2022, the basic costs of living have skyrocketed, eroding consumers purchasing power more quickly, making it especially challenging for those relying on a fixed monthly income.
This prolonged instability means it is even more important for South Africans looking to retire to ensure they fully understand the options available to them in the retail market. This is so they can make the best purchasing decisions to meet their individual retirement needs and live through old age in comfort and without too much financial stress.
There are two main options in the retail market that provide retirement income, which can be supplemented by income from any number of discretionary investments.
Non-guaranteed vs guaranteed
A “non-guaranteed” annuity is an investment-linked annuity that is more commonly referred to as a living annuity. As its name implies, although the asset stays your property, neither your capital nor income can be guaranteed. The value of your capital depends on the investment growth and volatility of the underlying investments, and the income may be set at regular intervals and calculated as an annual amount of between 2,5% and 17,5% of the investment value. This percentage can then be amended once a year, within the mentioned parameters.
On the other hand, a “guaranteed” annuity (also referred to as a life annuity or a term-certain annuity) guarantees you a regular monthly income for a specific period or the rest of your life. This income, depending on the contract, may or may not increase every year. Also, the capital is never again yours. When you pass away, and if you were married, a certain percentage of the income may still be payable to your spouse for the rest of their life. But when the last living assured life on the policy passes away, the capital is forfeited.
How about a bit of both?
A hybrid annuity (a combination of the two above-mentioned annuities) is a third option. By blending the life and the living annuity together, you are able to partially annuitise inside the living annuity. This means you can balance the various trade-offs by switching additional tranches into the guaranteed life annuity portion when you need to, and build an ideal portfolio over time.
While there is no perfect one-size-fits-all solution in retirement, it can be tricky to understand which of the above products are best suited to your circumstance. Our experience reveals six problem areas that should be weighed up before you make any decisions, so that you don’t fall short in retirement.
- Running out of money: With a living annuity you need to keep your drawdown rate in check. If you draw too high an income your capital may be depleted too soon.
- Funds not properly managed: The specific underlying investment funds from which your regular income is withdrawn in your living annuity can have a big impact on the longevity of your capital and should be considered very carefully, with your risk profile and investment time horizon in mind, as well as the need for medium- to long-term growth, and partial allocation to higher-risk investment funds.
- Buying too early: If you buy a guaranteed annuity too early in life, the income rate the insurer offers you may not be high enough. The older you are, the higher the starting income on offer would be, as the income is calculated on the investor’s life expectancy.
- No capital legacy: If you want to leave an inheritance to your children (outside of what a guarantee period provides for), you will probably not opt for a guaranteed annuity.
- Retiring too soon: this will also lead to a few years of extra income drawdowns and missed contributions and investment growth to your retirement fund.
- Going it alone: Not seeking professional advice can always prove to be a costly decision. Yes, costs must be kept to a minimum, but appointing a trusted financial advisor can be invaluable. Always keep the net (after fees) investment growth in mind.
Trying to make sense of your retirement options may feel like a minefield at first, but with some careful, considered research and planning, it is possible to navigate a retirement journey that stretches your savings to give you comfort and security through the good and the challenging times.
