Once A Week Cape Town, South Africa | How Do Retirement Annuities Operate?

Sep 22

Retirement planning aims to fit your financial decisions with the lifestyle you are preparing for. Technically, you should ensure that your Retirement Annuities in South Africa will be sufficient to meet your needs for as long as you live. This may appear to be a big order, but annuities were designed specifically for this purpose. Choosing the right annuity to provide a retirement income is essential but should not be daunting. By acquiring a comprehensive understanding of the several annuity options available at retirement and working with a financial advisor, you can make an informed selection that will enable you to enjoy the retirement you choose.

What is a pension or an annuity?

At retirement, at least two-thirds of the fund's profits must be spent to purchase an annuity. An annuity provides you with a monthly income or pension to cover your expenses throughout retirement.

Variable annuity types and their functioning

The two types of annuities are living annuities and guaranteed (or life) annuities. The key differences between these two annuities are your level of control and your risk exposure.

Living Retirement Annuity

With a living annuity, you have greater control, but you run the risk of running out of money.

A living annuity is an investment vehicle; your assets are invested in many funds to continue growing, and you can continue to receive a consistent income for as long as there is money in the annuity.

The risk of a living annuity, however, is that you may run out of money if:

The markets perform poorly, and your assets' investment growth is insufficient.
You withdraw an exorbitant amount of money.
You have a longer lifespan than expected.

This suggests that living annuities are ideal for people who like to make their own investment and income decisions and are ready to assume greater risk. Moreover, because you control all of your assets, a living annuity allows you to pass any residual funds to your beneficiaries following your death.

Guaranteed Annuities

A guaranteed annuity gives you less discretion but the security of a lifelong income.

Simply put, a guaranteed annuity is insurance coverage obtained from a life insurance provider. In exchange for your retirement savings, the insurer promises a monthly fixed income for life. The quantity of income will be decided by variables such as the value of your retirement savings, your age and gender (related to life expectancy), and the features of the product.

A standard guaranteed annuity expires with death, which means the income payments cannot be passed to beneficiaries. You trade access to your cash for the guarantee of a consistent income stream. It is favourable if you live longer, but it may not be profitable for your estate if you do not.

Guaranteed annuities are often more suitable for people who do not want the responsibility of managing their retirement money and who prefer the peace of mind above freedom of choice and the ability to leave any extra income to their dependents upon death.

Choose Wisely

It is possible to move from one living annuity to another and from a living annuity to a guaranteed annuity, but it is not feasible to withdraw from a purchased, guaranteed annuity. Therefore, it is vital to carefully consider your options.

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