10 NB considerations when choosing a retirement income solution
Published on 7th January, 2022 at 04:32 pm
When it comes to choosing a sustainable retirement income solution, there is no one-size-fits-all solution. Retirement income stream management also requires a careful evaluation of your specific needs, circumstances and concerns. Here, Palesa Mtimkulu, distribution support specialist at Glacier by Sanlam, explores 10 factors to consider when choosing your retirement income solution:
Consideration #1: Will my retirement savings last as long as I do?
With individuals now living longer than previous generations did, one of the most important factors to consider when choosing a retirement income solution is the potential lifespan of that solution.
Depending on the underlying products in your solution, there could be a risk of living longer than you expect to and outliving your retirement savings. This can happen if your retirement savings are used solely to purchase an investment-linked living annuity, where the retirement income is not guaranteed, and the underlying capital could be depleted by your chosen income drawdowns and market performance. To manage this risk in your retirement income solution, you may want to consider including a conventional life annuity in which your insurer bears your life expectancy risk and guarantees you a predetermined income until your death (or that of your surviving spouse).
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Consideration #2: Will my dependants receive an inheritance after I pass away?
You will also need to consider the needs of any dependants you may leave behind and whether you would like to provide for them using any remaining portion of your retirement savings when you die.
This is important, since with traditional guaranteed life annuities, the capital ‘dies’ with you and there is no capital inheritance for your dependants, unless you choose a guaranteed term and you pass away before the expiry of this guaranteed term. In this case, you won’t be leaving a capital inheritance, but you will leave an income for a specific period, and this provision is not foolproof. So, if you’d like to leave a legacy for you dependants, consider using a portion of your retirement savings to purchase a living annuity or an income with capital protection plan that will pay or transfer any remaining capital after your death to your nominated beneficiaries or estate.
Consideration #3: Will I be able to choose my desired income during retirement?
As we have seen from the global COVID-19 pandemic, no one can be sure what the future holds, nor what our income needs will be. The freedom to choose your desired income and to change it if necessary, along with your need for a secure income, are therefore important considerations when choosing your ideal solution.
If you choose to include a living annuity in your retirement income solution, you will have the option to select and change the amount taken as income each year, subject to the legislated limits. If you choose a guaranteed life annuity, on the other hand, your initial income and future income amounts will be predetermined by the insurer, based on the purchasing amount, your demographic, and the prevailing interest rates at inception. A life annuity can provide a level income or income that increases by inflation or a specified percentage.
Although conventional life annuities provide less income flexibility, a solution containing a guaranteed annuity provides you with income certainty that can help to ensure that you continue to cover your living expenses (eg groceries, medical aid premiums, property etc).
Consideration #4: What will happen to my dependants if I die sooner than expected?
If you pass away sooner than expected and the income payments from your chosen retirement solution stop, your dependants may be negatively impacted. This could be the case, for example, if you are using your retirement income to fund a dependant’s tertiary education and living expenses.
If you have chosen a guaranteed life annuity in your retirement income solution, you can include a guaranteed period, at inception of the contract, which will ensure that the income is paid for the specified number of years and that your dependants are provided for even if you pass away within that guaranteed period. Bear in mind, though, that in return for the guaranteed period, you will receive a lower income amount than you would in a life annuity without the guaranteed period.
Alternatively, a living annuity allows you to nominate a beneficiary who can choose to transfer the policy to a living annuity in their own name and/or receive the benefit as a lump sum when you pass away.
Consideration #5: Will my spouse still receive an income after I die?
It’s important to consider your spouse’s needs and what will happen to them in the event of your death.
If your retirement income solution is comprised of a guaranteed life annuity, and you plan to use that portion of your retirement income to support both you and your spouse, they may be financially dependent on that income, and you would need to look at whether they will still need the income if you pass away before them.
As an annuitant in a conventional life annuity, you can choose between:
A single life annuity
This will cease income payments at the earlier of your death or the guaranteed period, or
A joint-life annuity
This will only cease income payments on the death of the surviving spouse.
Consideration #6: Will I be able to choose where my money is invested, and change my insurer?
If you are an annuitant of a guaranteed life annuity, you do not have a choice in the underlying investment of the capital. Investment-linked living annuities, on the other hand, are linked to investments, and allow you to choose the underlying investments, and therefore, the level of exposure to different asset classes.
Depending on the retirement income solution you choose, you may not have the flexibility to move to another annuity or insurer. You can add to a living annuity, transfer a living annuity to another insurer or purchase a life annuity with your living annuity capital at a later stage. Once you are in the life annuity, though, you can’t add to the capital, and you can’t transfer the funds to a living annuity or to another insurer.
Consideration #7: How will market movements impact my capital?
Your investment outlook and your appetite for exposure to investment risks should also be considered when deciding on the combination of products that will make up the right retirement solution for you.
While investment-linked living annuities have the associated risk of market fluctuations and poor investment returns, which could negatively impact your retirement savings capital and income, annuitants of a guaranteed life annuity are not impacted by market movements in the underlying fund, as the insurer takes on the investment risk.
Consideration #8: Will I be able to access my money if there is an emergency?
The remaining funds in a living annuity are only available to you as cash when the fund value is below R125 000. The funds used to purchase a life annuity are not available at all. This is why it’s important to make provision for an emergency fund that can be accessed during your retirement years.
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Consideration #9: Will my income be able to keep up with inflation?
To ensure that you can continue to cover your living expenses, and your income is protected against a decline in purchasing power, you will need your retirement income to keep up with inflation.
The market exposure in investment-linked living annuities can potentially provide income and capital growth that will allow for your annual drawdowns to keep up with inflation. Choosing to have your guaranteed life annuity increase in line with inflation can also provide protection against inflation increases.
Consideration #10: How will tax impact my retirement income?
The underlying capital investment in an annuity will be exempt from tax. The income provided from both life annuities and living annuities purchased, using compulsory retirement savings from a retirement fund, is, however, taxed at your marginal tax rate according to the income tax tables. This tax will be withheld by the respective insurer and means that the amount of your annual income drawdown will impact the amount of tax paid.
Are you making the most of your tax-free investment plan? Read this to find out.
Glacier has several retirement solutions to help you retire with confidence. Before choosing your combination of retirement income solutions, it is strongly recommended that you consult an appropriately accredited intermediary about your unique circumstances and needs.
Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are Licensed Financial Services Providers.
Book a meeting with an intermediary today to make retirement income choices right for you.
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