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Your retirement income options

May 22, 2019

There are two main options when it comes to purchasing an annuity income: a guaranteed life annuity or a living annuity.

Your retirement income optionsIf you are a member of a pension fund or have a retirement annuity, two-thirds of your final retirement amount must be used to purchase an annuity income. However, if your pension or retirement annuity is worth less than R247 000, then you can take the full amount without purchasing an annuity.

You can take one-third as a lump sum but tax will be applied. You receive R500 000 tax free, but this could be reduced if you made withdrawals from your pension fund when changing jobs.

If you are a member of a provident fund, currently you could still take the full amount as a lump sum, however, this will attract tax and it may make more sense to purchase an annuity as this would then be transferred tax free.

Listen to Maya and Mapalo Makhu discussing this and other topics in the My Money, My Lifestyle podcast.

There are two main options when it comes to purchasing an annuity income: a guaranteed life annuity or a living annuity. It’s important to know that once you have purchased an annuity you cannot “undo” it and get your capital back.

Guaranteed income for life

In the case of a guaranteed annuity, you purchase an income for the rest of your life. It is not like a bank account for example, where there is a balance that earns an income. With a guaranteed annuity you hand over a lump sum in exchange for the guarantee that you will receive a set income, with the option of increasing with inflation, for the rest of your life. The annuity continues for as long as you live but stops when you die. This effectively forms a cross-subsidisation between people who may pass away earlier than expected and those who live well beyond the expected life span.

If you have had health issues prior to retirement, it is worth asking for an underwritten annuity. This is where the insurer takes your health status into consideration for calculating your income. If your health status indicates that you may not live to the average life expectancy, then you would receive a higher monthly income.

Most guaranteed life annuities do include a guarantee period where the income continues to be paid to your beneficiaries, even if you pass away. For example, there may be a five or even ten-year guarantee period. You could also opt for your spouse to continue to receive a percentage of the annuity income after you pass away. These all affect the cost of the annuity, or put another way, the amount of income you receive.

You should always opt for an annuity that increases in line with inflation, otherwise your income will not keep up with your expenses. This will mean less income initially, but during your younger retirement years you can still supplement your income with ad-hoc work, but you do not want to have to do this in your later retirement if your income is not keeping up with your expenses.

Market-related returns

With a living annuity you have an investment portfolio which means your income is determined in part by the return of the underlying investments. You can draw down between 2.5% and 17.5% of the capital each year. This allows more flexibility in terms of your income – so you could draw down less in your first years of retirement if you are supplementing with part-time work, and then increase the percentage in your later years. Any balance in your living annuity is paid to your beneficiaries when you pass away.

The problem with a living annuity is that the income is not guaranteed and you could run out of money before you die. The income depends on the performance of the underlying assets. The recent poor market performance has seen many retirees eating into their capital which means they have to reduce their drawdown or they will run out of capital. Ideally you should not draw more than 5.5% of your capital per year. If you draw more than that the capital amount will not be able to grow with inflation and your income will be eroded over time.

Unlike a guaranteed annuity, you can withdraw capital from your living annuity but only if the balance has fallen to R75 000, or R50 000 if you took the one-third lump sum at retirement.

Hybrid annuity

Another option is to consider a combination of both a guaranteed annuity and a living annuity. You could purchase a guaranteed annuity that just covers your basic monthly expenses. This means you know you will always have enough to survive. The rest you invest in a living annuity. This gives you the flexibility to draw down when you need to and any unused funds can be left to your beneficiaries.

How much do you get for R1 million?

In the year after retirement, a man aged 65 with retirement savings of R1 million could expect to receive:

  • R80 000 (8% of R1 million) from a guaranteed life annuity, guaranteed for life; or
  • R55 000 (5,5% of R1 million) from a living annuity, with a 90% probability of sustaining this level of drawings for life.

Similarly, in the year after retirement, a woman aged 60 with retirement savings of R1 million could expect to receive:

  • R55 000 (5,5% of R1 million) from a guaranteed life annuity, guaranteed for life; or
  • R45 000 (4,5% of R1 million) from a living annuity, with a 90% probability of sustaining this level of drawings for life.

In all cases, the income is targeted to grow with inflation each year on consistent assumptions.

Guaranteed life annuity vs living annuity percentage drawdowns

What is underwriting at retirement and how can it benefit you?

According to retirement provider Just, underwriting at retirement is a 20-minute confidential phone call by a trained professional to establish whether health or lifestyle factors could reduce your life expectancy. If they do, you may qualify for a higher income for life. For example, you may qualify for a higher income if you have:

  • earned lower income over your lifetime, which might have meant less access to health care and nutritional food; and/or
  • a lifestyle that exposed you to health risks, such as underground work, smoking, drinking or high body mass; and/or
  • a life-shortening illness;

Underwriting is optional, and will never reduce your income.

Do you qualify for the State Old Age Grant?

3,5 million South Africans received State Old Age Grants in December 2018. You qualify if you are a South African citizen or permanent resident older than 60 and living in SA and:

  • if you are single, you earn less than R78 600 a year and have assets worth less than R1 122 000 (excluding the home you live in);
  • if you are married, your household income is less than R157 200 a year and you have assets worth less than R2 244 000 (excluding the home you live in);
  • you do not receive any other social grant and you are not cared for in a State institution.

Members of Government Employee Pension Fund

The GEPF has its own set of rules. Any lump-sum payment and income is determined by a formula based on years of service and contributions. The annuity received tends to be at a better rate than if you bought a guaranteed annuity in the market as the GEPF does not have to pay fees.

The income automatically increases each year at 75% of the official inflation rate which could be higher depending on the performance of the fund. On 1 April 2019 the increase of 5.2% was in line with inflation. The annuity is guaranteed for 60 months after retirement, which means your beneficiaries will still receive the income until 60 months after retirement date. It includes a spousal benefit of 50% of the pension should the main member pass away first. It also provides funeral benefits for the member, spouse and eligible children.

This article first appeared in City Press.

Related: Investing in retirement

26 Comments

  1. Hi,

    If I made a withdrawal prior to retirement. Can I make a 1/3 lump sum withdrawal at retirement and will R500 000 or less be tax free?

    Reply
    • Your tax-free amount at retirement will be reduced by the amount you took prior to retirement

      Reply
      • I was taxed a huge % on the withdrawal I made.

        Reply
        • Apologies, correct. It applies only to the tax-free portion you may have received. If it was a normal resignation and not retrenchment then you would have had around R25k tax-free

          Reply
  2. Hi Maya,
    I am 68 and in bad health. So I won’t make it another 10 years.
    I will be inheriting R2 Million shortly.
    If I put in a Living Annuity how much can I expect per month.
    Regards
    Johan

    Reply
    • You can draw down a maximum of 17.5% of the capital each year from a living annuity. I am not sure, however, why you would opt for a living annuity unless this is coming from a retirement fund.
      You could simply invest it in a low risk fund.
      Alternatively you could purchase a guaranteed annuity from somewhere like Just retirement. They will provide a much higher annuity income if you are ill. The benefit is that if you do live longer the income is still guaranteed

      Reply
  3. Hi Maya, I am a 65 year old man, wih ten RA’s, divided amongst five different providers. Some are valued less than R274000, some are more. How does the allowance to take the full amount work,if the RA is < R274000? Does it apply to each RA individually, or is it a total of all RA's?
    Thank you.
    Steven

    Reply
  4. Good day Maya am 36 I have a retirement fund from workand Retiment annuity and am contributing the maximum of 27.5. I am also contributing the R3000 in tax free asset and also have an endowment plan of R2200 a month which will mature in 5 years. Would this be enough to have good income at retirement. What other long term investments can I look at as I have an excess of R4000 that I would like to invest on monthly basis to cover for my two children university and high school. The children are currently 1 and 3 years.

    Reply
    • you are doing so well – well done!! Remember you can open a tax-free investment in your children’s name. You could open a tax-free investment and contribute an additional R3000 per child. But this would affect their lifetime limit, so if you were planning on using it for education, then it would be better to open a normal investment account.
      In terms of your retirement – there are some great calculators that help you assess your future income in retirement – https://www.prudential.co.za/personal-investor/our-funds/tools/retirement-calculator/

      Reply
  5. We have a Living Annuity I am 79 my wife 73 am thinking of switching 75:percent to a guaranteed annuity. Have been quoted for a with profit annuity, would an inflation linked be better.
    Not quite sure of the with profit in view of the current unstable market. The idea is that the annuity will supply our normal expenses and the LA drawn down at 2.5 or 3 percent would provide discretionary expenses and an estate for heirs.
    Can you explain better the with profit annuity please

    Reply
    • I am not allowed to give direct advice but in principle it sounds like a solid plan to have a combination of a guarantee and living annuity and actually how my mother’s retirement fund is structured.

      With profit means that rather than buying a guarantee with a specific inflation adjustment each year, your annual income increases based on the underlying investment returns – although your initial income is always guaranteed. Your guaranteed income will rise in line with bonuses declared (usually annually). These are based on the investment returns, subject to certain actuarial adjustments. If you start off with X and the bonus is Y, you will receive X + Y, which forms your new guaranteed amount (your income in future will never fall below the guaranteed amount). If the returns on the investment portfolio are negative, your income will not increase, but it won’t decrease. You choose what is known as an initial purchase, or discount, rate, which gives you greater or lesser exposure to the with-profit returns. The higher the purchase rate, the higher your initial income, but the less you will receive in bonuses, resulting in a pension that is less likely to keep pace with inflation. The lower the rate you choose, the lower your initial income, but the greater the chance that your income will keep pace with or beat the inflation rate over longer periods.

      You are already blending your retirement income by selecting a guarantee and living annuity – you need to decide if you want to take the extra market risk on your guarantee or lock in with a guaranteed inflation adjusted income.

      Reply
  6. good day my name is Bryan i currently have a retirement living annuity with old mutual and receiving a 2.5% monthly income of the investment, if i increase to 5% will my investment be eroded over time.

    Reply
    • The current thinking is that you should not draw more than 4% to 5% – but it also depends on market conditions. If market returns are negative it could erode some capital. It also depends on your age as that gives an indication of how long you will still need to draw an income. Your adviser should be able to assist with this (trust me you are alreadt paying a hefty fee to him/her)

      Reply
  7. Hi Maya,
    If I buy a guaranteed life annuity, what securities are there on the policy.
    The insurer may invest this money in various portfolios (unit trusts etc)
    in order to provide my monthly pension.
    What would happen to this guaranteed life annuity if the insurer goes bankrupt?
    Kind regards
    Manfred

    Reply
    • with a guaranteed annuity the life company does not actually invest the money into unit trusts etc. That would be a living annuity. They underwrite it typically with bonds. There are very stringent rules governing their solvency rates and reserves so one would want to be with a well regulated insurer.

      Reply
  8. Hi,
    My retirement value at GEPF is now at just over 3 million and I’m not too well to wait till im 60. I’m 56. I qualify for early retirement but i have about 370 thousand in debt which i need to settle when i retire. I was promised about 800 thousand as my one third before tax. This will leave me with very little to improve my current life style. Is resigning and investing in a bank or something else advisable? Please help

    Reply
    • If you took R3 million and invested it to give you an income for the rest of your life, you would only get about R10 000 per month. If you settled your debt from the R3 million you would have even less to provide an income. Ask your HR department to calculate what you would receive as an income from GEPF based on your years of service and if you took R500 000 tax-free. then you can do a proper comparison.

      Reply
  9. Good day Maya,

    Thank you for the article. I am in my mid 30’s and currently working for the government (5 years now) and have a contribution to GEPF. I don’t have any other retirement savings and learned that having a living annuity separately from GEPF was a good idea.

    Please provide advise.

    Reply
    • Think about putting money into a tax-free savings account. You can put R33 000 a year (R2750 a month). This can be used to supplement your retirement later, but you can access it at anytime if you need it before then. My website has lot of info on this

      Reply
  10. Hi Maya,

    I am a 36th year old woman and have no retirement annuity in my name as yet due to past jobs i couldn`t afford one. I want to start contributing towards my RA next year, will R1000 a month be enough for R1m pay out by the time i turn 60years? Can you please advise on how much would be enough per month for R1m RA.

    Reply
    • Using a quick calculation, if you average 10% return over the period you should reach R1 million. But a few points to consider:
      Due to inflation R1 million will not buy you what R1 million can buy you today. To have R1 million in today’s value you would have to contribute about R2000 a month. A good strategy would be to start with R1000 now but increase that by 10% each year.
      10x.co.za has some useful calculators for retirement
      https://bluegiraffe.10x.co.za/

      Reply
  11. Hi Maya

    I’m 55 and took early retirement at end of April. I have a provident fund of R1mil. Should I use the same scenario as your article above?

    Should I take the R500k tax free and put the rest into a preservation fund? Do I take out both a living annuity and a guaranteed annuity or should I invest the other R500k. If so where’s the best place to invest with a medium risk.

    Thank you kindly
    Mehroon

    Reply
    • I strongly recommend you get advice – there are a lot of variables including how much you need to live, your current health, other income you may have

      Reply
      • Hi Maya

        Turning 55 in 2 months.Took a package 18 months ago and transferred pension into AFRIS preservation fund.I now need to purchase a living anunuity.Looked at all available and also deliberated broker fees etc.No major expenses or owing.Any advice on which living annuity fund to look at going forward in the current circumstances ,how to structure and company that provides.

        Regards
        Lawrence

        Reply
        • You do really need good advice – a financial adviser that can build you a cashflow analysis is now more important than ever!
          I would recommend you work with a financial planner that charges a fee to create the plan – then you know their income is not dependent on selling you something.
          A popular option is a hybrid that pays you a set income for life but with some market upside

          Reply

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Maya Fisher-French author of Money Questions Answered

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