If you retire in 2023, one of the most important decisions you will make will be in relation to the type of annuity (income stream after retirement) you will receive to replace your monthly income after retirement.
Before choosing the type of annuity you want to receive, first do a budget of your essential, non-essential (nice to haves) and luxury expenses after retirement. Essential expenses are the basic expenses like food, house, electricity, phone and transport; non-essential expenses might be satellite television or dining out
You can choose from two types of annuities, namely life annuities and living annuities or you can choose a combination of the two.
With a life annuity, you “trade in” your accumulated retirement savings, for example, R1 000 000, for a guaranteed income for life, for example, R10 000 per month. You therefore enter into an agreement with your fund or an insurer that you will pay them a once-off amount of R1 000 000 and they undertake to pay you R10 000 per month for the rest of your life. If you therefore live for more than 100 months after retirement, you will probably benefit because the monthly payments that you receive per month for the rest of your life will be more than R1 000 000 as the fund carries the longevity risk. If you live less than 100 months after retirement, the fund or insurer will probably make profit as no payments are due after your date of death and they would have paid out less than R1 000 000 to you while you were alive. It is however possible to buy a living annuity from an insurer where the insurer guarantees to pay a minimum number of monthly instalments, for example 120 monthly payments (10 years). If you therefore die in the ten-year period, the outstanding monthly payments will be paid to your deceased estate.
A living annuity is a tax-free investment account that your fund or an insurer can offer you in which you can invest your retirement savings and from which you can choose how much of your capital you want to withdraw as a monthly annuity/pension. You are legally limited to withdraw between 2.5% and 17.5% of your capital per year. If you, for example, invest R1 000 000 into this account, you can withdraw between R2 083 and R14 583 per month (on which you will pay tax), but if you earn R100 000 per year in investment income, that investment income will be tax-free. If the amount you withdraw from your investment account is less than the tax threshold (R91 250 for persons under 65 years, R141 250 for persons between the ages of 65 years and 75 years and R157 900 for persons over the age of 75 years), then that whole amount will be tax free.
The benefits of a living annuity are that you have the freedom to decide what your monthly income is, how your money is invested and what will happen to your money after you pass away. The drawback of a living annuity is that you will carry the investment risk and the longevity risk. You will benefit from making good investment and withdrawal decisions, but you will also carry the burden of a bad investment or withdrawal decision that can lead to your money running out sooner rather than later.
Take the table below into account before you decide on which type of annuity is most suitable for your needs or if a combination of the two can add more value to your retirement life:
| Life Annuity | Living Annuity | |
|---|---|---|
|
What happens to my savings at retirement? |
You pay your money to the fund or insurer and the fund or insurer agrees to pay you a guaranteed, taxable monthly pension for the rest of your life. |
Your savings are invested in a tax-free investment account at the fund or insurer from which you can withdraw an income. |
|
For how long will I get a monthly pension? |
The fund or insurer guarantee that it will pay a monthly pension for the rest of your life. |
You will be able to withdraw a monthly income from your investment account for as long as there is money in the investment account. |
|
How much income can I withdraw? |
The monthly pension (and increases, where applicable) will be fixed or determined when you buy the pension at retirement. |
Your monthly withdrawal amount will be determined by legislation, the rules of the fund or the conditions set by your insurer. |
|
What can affect my monthly income? |
The fund or insurer guarantees the payment of your monthly pension irrespective of the economic circumstances. |
Your capital and monthly pension will be affected by the performance of your investment portfolio based on the economic circumstances. |
|
Can I pass on my pension savings to my nominees after my death? |
No, the income stops at your death unless you bought an annuity with a guaranteed period or a double life annuity for you and your spouse. |
Yes, the capital that is left in your investment account at your death can be left to your nominees. |