IN SHORT: The world of investment has a plethora of options. While employed you have to choose between a pension or provident fund, or retirement annuity. After you retire you have to decide whether you would prefer a secure, guaranteed monthly income or a more flexible income that depends on investment returns.
When it comes to retirement there are two key choices: where to invest before retirement and where to invest after retirement. Here’s what’s on the menu.
PRE-RETIREMENT
Pension or Provident fund
This is the most common retirement savings vehicle, but it is only available to employees because it is deducted from their salary.
You choose: Such funds have limited flexibility. The board of trustees selects a short list of investment options from which you can choose one or two. If you resign before retirement, you can transfer your funds to your new employer’s pension or provident fund or move them to a preservation fund.
Retirement Annuity Fund
This is a tax-efficient savings option if your employer doesn’t offer a pension fund or if you are self-employed.
You choose: Within the retirement fund regulations, retirement annuity funds provide clients with a greater amount of choice. For example, you can choose between fund managers and high- or low-risk funds.
Preservation Fund
This option is primarily used to receive lump-sum benefits from other pension or provident funds and continue to grow savings.
You choose: You can retire from a preservation fund at 55, before which you can make one partial or full withdrawal.
Tax-free Savings Account
In a bid to incentivise South Africans to save, the government offers this savings vehicle that is open to anybody. However, it has its limitations – you can only invest a maximum of R36 000 per year and R500 000 over a lifetime. You will only be taxed on the investment growth above R500 000.
You choose: The funds are immediately accessible – you can withdraw them as needed.
POST-RETIREMENT OPTIONS
Guaranteed Life Annuities
In traditional life annuities, pensioners are offered a guaranteed lifetime income (a set monthly amount) that never gets smaller. These annuities are further categorised into with-profit and non-profit guaranteed life annuities. The with-profit guaranteed life annuities have underlying investment components that determine the yearly increase potential, while non-profit annuities include inflation-linked or fixed-escalation annuities, providing a guaranteed yearly increase either equal to inflation or to the selected fixed escalation rate. Bear in mind, once you opt in for this type of annuity, you cannot ever opt out.
You choose: You decide how your yearly increase is determined.
Living Annuities
A living annuity is linked to an investment portfolio with an investment company; therefore, your income is dependent on the amount invested and the performance of the underlying investments. With this option, a pensioner can adjust the annual drawdown rate between 2,5 and 17,5%. However, this option does not guarantee an income for life as it can run out.
You choose: You can choose a new drawdown rate every year to match your changing income needs. You can also move the savings to another investment company or into a life annuity as you get older.
Blended Annuity
This type of retirement option is used to better manage the higher risk of living annuities and the rigidity of guaranteed annuities. At retirement, retirees can split their pre-retirement savings between multiple living annuity and or guaranteed life annuity products, with either one or multiple insurers. Some insurers allow you to allocate portions to the life annuity component over time (but it cannot be reversed).
You choose: With this option, retirees can balance their wants and needs by deciding how much to allocate to the guaranteed income portfolio and how much should remain flexible.
TAKE THE QUIZ
Just SA has done a tracking study to understand the South African retirement market. See how you compare with the study participants of 2022:
1 Do you save and plan ahead for retirement? YES / NO
Only 5 out of 10 participants plan for the future.
2 Do you use – or intend to use – the services of a professional adviser? YES / NO
Only 3 out of 10 will seek professional advice.
3 Are you confident that your retirement savings will last? YES / NO
Only 4 out of 10 are confident their savings will last.
4 Do you think your health is above average? YES / NO
average or better than average.
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