SUNDAY TIMES - Investigating annuities that will fund your retirement
Sunday Times Opinion By Dineo Tsamela, 2017-03-19 00:00:00.0

Investigating annuities that will fund your retirement

ENJOYING LIFE: If you're going to live as long as Georgina Harwood, you need to have the financial resources to celebrate your 100th birthday by doing a tandem parachute jump.

When you start getting closer to retirement, thinking about how you're going to survive is crucial, and choosing the appropriate annuity is not a decision to take lightly.

There are several factors to consider when you make your decision on which annuity option best suits your needs, bearing in mind that what you think will happen as opposed to what will actually happen could be two different things. When you retire, you'll need to know where to invest your retirement savings and which product will provide the best security for your lifestyle.

Living annuities are usually best for people with more money to invest - anything above R2-million.

With a living annuity you also have the option to decide where and how your money is invested.

This gives you some autonomy in determining what to invest in, and the risks that come with it.

And risk is particularly important because - depending where your money is invested - you need to be aware of the implications of market movements, interest rates and inflation on your capital and the income you will rely on.

Before choosing a living annuity, weigh up your needs. Would you be comfortable with the value of your retirement savings fluctuating?

In terms of your income or the amount you will draw as a pension, you need to be aware of all the costs that come with a living annuity and how that will impact your capital - the money you have invested.

You are allowed to withdraw between 2.5% and 17.5% of your capital annually, with the option to change your income once a year. For instance, if you have set a specific monthly income for the first year and feel it's too low or too high, you may change it on the anniversary of your policy.

A guaranteed annuity will offer a consistent income until you die. You don't have to worry about outliving your capital.

However, if you die before your capital runs out, it does not go to your beneficiaries, but stays with the service provider. In this respect, guaranteed annuities are a form of insurance against the possibility of living longer than you anticipated.

It may appear unfair that your beneficiaries get nothing if capital is left over, but the service provider is taking a risk by guaranteeing you a consistent income, no matter how long you live.

Unlike a living annuity, the structure of a guaranteed annuity is rigid. For instance, once you choose your annuity you cannot change service providers, so do your homework and make sure you choose a reputable service provider.

There are two types of guaranteed annuities - traditional annuities and with-profit annuities.

In terms of a traditional annuity you can choose a level annuity - which means this monthly payment will stay the same for the rest of your life. A fixed annual escalation annuity will increase each year by pre-agreed percentage.

The other option is a traditional annuity that increases with inflation. You can compare the types of increases and see which is more beneficial for you.

In terms of a with-profit annuity, your income varies according to the profit or losses made from your investment.

It's important to consult a financial planner about which option is best for you. Also ask your planner about policies that offer a combination of living and guaranteed annuities.

Don't take anything for granted and don't leave your retirement to chance. If you make a mistake, it will have an adverse effect on your family.

• Follow the author of this article, Dineo Tsamela, on Twitter @DineoTsamela