The emotional toll of choice
Must purchasing an annuity at retirement be an either/or decision?
The start of every new year brings many aspects of our lives into focus, including health, wealth, work, family and emotional wellbeing. It’s a good time to re-evaluate your quality of life and question the changes you need to make in order to improve it. It’s also a good time to assess your retirement savings and see if you’re on track for a carefree retirement.
In the face of increasing costs and household debt, the notion of retiring comfortably may seem out of reach for many South Africans. But for the best chance of a smooth transition to a sustainable retirement lifestyle, it is vital that you plan ahead and save enough money in your working years to cover your essential expenses in retirement for as long as you live.
In February, you have one final opportunity to ensure that you have contributed as much as you can towards your retirement and any other tax-free products before the end of the financial year.
If you have an employer pension or provident fund, this means topping up your retirement contributions, where possible, to a maximum of R350,000 or 27.5% of your taxable income. If you are self-employed, or unable to top up your retirement fund, you may consider contributing to a retirement annuity.
But even as you're saving for retirement and using every last option available to save tax on your retirement investments, it is also a good time to consider the old adage ‘forewarned is forearmed’ and think more carefully about what you'd like to do with your retirement savings when you get there. You will be met a with a range of choices, and there will be trade-offs.
The one decision you can’t avoid – but you don’t need to lose sleep over it
The biggest choice you'll have to make at retirement is between buying a life annuity or a living annuity. Current regulations require you to use a minimum of two thirds of your retirement fund income to purchase one or the other, or a combination of both. Which one should you choose?
In today's world of ever-increasing market uncertainty, the comfort of a guaranteed income from a life annuity cannot be underestimated, serving as an alternative regular ‘salary’ to cover essential expenses in retirement. And yet concerns around leaving a capital legacy may play on your mind, making it more difficult to choose. Thankfully, new generation annuity solutions offer ways around that.
While it would be easier if all choices were purely black and white, with the benefits or downsides of each choice clear cut and unequivocal, in reality making the ‘best’ choice in any given situation often involves compromise.
For example, is it worse to leave your beneficiaries without a legacy, if leaving a legacy means you'll actually be financially dependent on them while you’re still alive? Respondents of the Just Retirement Insights survey revealed that their grown-up children would be the first point of call for help should they run out of retirement income, and many respondents were not confident that their savings would last.
With a life annuity, there is the option to leave a legacy in a different way – as an income stream that will continue to cover your dependants’ expenses after your death.
So, while your ‘best’ choice of annuity product will depend on your unique personal situation, it will be helpful to know that choosing between a living or a life annuity does not need to be an either/or decision. A blended annuity combines the best of both and and allows you to manage your retirement savings in one living annuity vehicle while securing a stable income stream with the remaining portion of your assets.
Article by Deane Moore, Just SA CEO