As retirement approaches, one of the most critical decisions individuals face is how to convert their hard-earned retirement savings into a reliable income stream throughout their retirement years. Retirees have a choice between two products for their retirement income, known as life annuities and living annuities. Both products offer distinct features and benefits, catering to different retirement needs and preferences. In this article, we will first unpack the implications and considerations of withdrawing funds from your retirement products at retirement. Then, we will delve into how life and living annuities work, helping you make an informed choice for your golden years.
Implications and Considerations of Withdrawing Funds
During your accumulation years, you would have built up a substantial pot of retirement funds probably in various products such as retirement annuities, preservation funds and/or pension and provident funds. Before using these funds to purchase an annuity, you will have the option to withdraw a portion of the funds. The amount available for withdrawal depends on the type of product in which the funds are held, as well as the timing of the investment. However, it’s equally important to evaluate your individual situation to determine the optimal withdrawal amount based on your circumstances.
Some things to consider is whether you have made withdrawals from your retirement funds previously as this will be taken into consideration when calculating the amount of tax payable on the withdrawal. Withdrawals at retirement are calculated according to a sliding scale and if it is your first withdrawal from your retirement funds, the first R550,000 is taxed at 0%.
Another aspect to bear in mind when considering how much you should withdraw, is what you would want to use the funds for. It can be used to repay expensive debt, make lifestyle adjustments such as moving to a house more suited towards this new chapter in your life or it can be used to invest in discretionary products to ensure you have access to these funds freely later if your annuity payments are not sufficient.
Once the retiree has decided how much he will withdraw from his retirement funds, he will be faced with the choice of using the remaining funds to either purchase a life or living annuity.
Life Annuity
A life annuity is a retirement income product that is usually purchased from an insurance company that offers the promise of a guaranteed income for the remainder of the annuitant’s life. To initiate a life annuity, the individual will use their retirement savings to purchase such a life annuity with an insurance company or financial institution.
In return, the annuitant receives a regular income, typically paid monthly, for the rest of their life. This income is pre-determined based on factors like the annuitant’s age, gender, prevailing interest rates, and life expectancy at the time of purchase. Once the life annuity is purchased, the annuitant no longer bears any investment risk. The responsibility of managing the underlying investments and ensuring consistent income falls on the insurance company or provider.
While the annuitant enjoys the security of a guaranteed income, it is important to note that they cannot access the original lump sum again. The capital is converted into an income stream, and upon the annuitant’s passing, any remaining funds typically remain with the provider of the life annuity.
Living Annuity
With a living annuity, on the other hand, the retiree retains more control over their retirement funds. Instead of converting the entire lump sum into a guaranteed income, the individual can invest their savings in a range of assets, such as shares, bonds, and cash. The annuitant can decide on the annual income they wish to withdraw, typically subject to certain regulatory limits. This flexibility allows retirees to adapt their income to changing circumstances or needs.
Unlike a life annuity, where the insurance company manages investments, the annuitant assumes the investment risk in a living annuity. The performance of their chosen investments directly impacts the sustainability of their retirement income. While a living annuity offers flexibility, it also comes with the risk of depleting retirement funds prematurely if withdrawals are excessive or if investments underperform.
Before making any decisions, it is crucial to seek advice from a qualified financial advisor who can assess your unique circumstances and help you choose the retirement income product that best aligns with your long-term objectives. Whether you opt for a life annuity or a living annuity, planning for retirement early and wisely can pave the way for a comfortable and financially secure future.
