Choosing your retirement income

2016-06-30 06:00

AS you approach retirement you are faced with having to make many important decisions.

One of these decisions is the choice of whether you purchase a guaranteed annuity or a living annuity with at least two-thirds of your accumulated pension fund or retirement annuity capital. This decision will have a significant impact on whether you are able to maintain your standard of living during your golden years. Before weighing up these two options, let’s start off by defining them.

- A Guaranteed Annuity provides, as its name states, a guaranteed income according to the terms and conditions of the product. This income is taxable and is determined by the amount the insurance company pays you on the day that you retire and is directly linked to long-bond rates. The decision to invest in a guaranteed annuity is final. Once you have agreed to the terms and conditions no changes will be allowed.

- A Living Annuity (also known as an Investment Linked Living Annuity or ILLA) allows you to select your rate of income between 2.5% and 17.5% annually which is withdrawn from your capital and which is taxable. You can amend this rate every year on the anniversary date of your living annuity.

Growth of your capital and income is determined by the growth rate of your selected underlying funds. Detailed attention needs to be given to constructing your portfolio and we recommend that unless you are personally adept at financial calculations, you should consult a financial advisor to assist you.

If you choose to invest in a living annuity you will be able to transfer to a guaranteed annuity.

Your choice of annuity will have an impact on your retired lifestyle.

When making this decision you would do well to consider the following three aspects:

- Income from your annuity. When you take out a Guaranteed Annuity you will receive a stipulated income for the rest of your life.

The income is determined by the interest rates at the time of you commencing your annuity. Economics state that when interest rates are high inflationary figures tend to be as well.

- When taking out a Living Annuity, you determine what your income will be. The key to ensuring that a) your money lasts and b) continues to grow at a rate above inflation is to keep your stipulated drawdown to a minimum. The underlying funds in your portfolio should provide the growth required but it is vital that you structure your required income so that your post-retirement capital lasts for as long as you are going to need it.

A key benefit of a Living Annuity is that when economic and market conditions change dramatically they have done recently, you have the option to adjust the income level and the asset structure accordingly, in a Guaranteed Annuity you have no control over either of these aspects.

- Be cautious as too much exposure to riskier asset classes in falling markets could see you experiencing a so-called “double whammy” whereby you deplete your capital by drawing an income from a declining capital base – a situation that is difficult to recover from.

Residual Value of the Annuity – “leaving something behind”

A significant difference between a Guaranteed Annuity and a Living Annuity is the treatment of the residual capital that remains after your death. Quite simply, in a guaranteed annuity there is no value at death. Any remaining money is withheld by the insurer:

They bear the risk that you might live for a long time after retirement so they keep the residual assets if you die shortly after retiring.

In a Living Annuity, however, the residual value of the capital at the time of your death is payable to your elected beneficiaries. This means that living annuity investments can, if managed efficiently, have enduring value to your beneficiaries.

Although this will probably not be your primary objective for your postretirement savings, but if possible is a wonderful gift to your beneficiaries.


The information is only intended to be of a general nature and should not be relied upon by any part without obtaining full details from a licenced financial service provider.

Contact me on 083 399 3905, my office on 032 944 3051 or e-mail me on for an appointment to discuss the above or any other financial planning.

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