What happens to my retirement income when I die?

2014-07-27 15:00

There are two options for your funds when you retire. You should choose carefully.

Mike writes:

After you have gone on pension, your retirement annuity will be paid out as monthly income.

But is it true that this will stop paying an income when you die, no matter how much of it has been paid out?

What about any dependants who might still be alive without any further payments?

Nico-Louis Minnie, Head of Wealth Platforms at Liberty Investments replies:

This is not entirely true. When you reach retirement age, the proceeds from your retirement annuity have to be used in a certain way but it is not as restrictive as you might think.

Up to a third of your retirement annuity can be withdrawn and taken as cash.

The remaining two thirds must be used to secure an income in retirement. There are two ways of doing this, either through a life annuity or a living annuity.

A life annuity pays a monthly pension (level or escalating) for as long as you live.

The payments cease upon death and nothing is bequeathed for your beneficiaries. Many annuities come with a guarantee period of five years, in which case the income will continue to pay out to your dependants for the full five years if you die before that time.

You can increase the guarantee period but then you will receive less monthly income.

There are options available that will allow the pension to be paid to a spouse even after the death of the main recipient – this is important if your spouse is relying on you for financial support.

The main attraction of this type of annuity is that you can never outlive your money since the life annuity will pay a monthly pension for as long as you live, irrespective of market or economic conditions.

Under the living annuity option, you invest the proceeds from a retirement annuity in an investment account that grows in line with the selected investment portfolio.

The monthly pension is then drawn from this investment, but it is not guaranteed. If there are poor investment returns, or if you draw too much out of it, you could run out of money.

The benefit of this annuity is that it provides income flexibility. Your beneficiaries receive the amount that is left in the investment at the time of death. This is only a good option if you can live off 5% of your capital, otherwise you will run out of money quite quickly.

City Press replies:

It is best to get financial planning advice on which is the best option for you. Be careful about worrying too much about leaving money to your children at the cost of not having enough for your retirement income.

As you are still some time away from retirement, this is a great opportunity to find out if you have enough for retirement and to save more if not. The more money you have, the more choices you’ll have available.

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