Tuesday, January 18

Will you be retiring soon? Here’s what you need to know about annuities.


FIFI PETERS: In this week’s Personal Finance feature, we discuss how we can better plan for our retirement so that we can maintain our standard of living when we are no longer working. The savings tool that can help us do this is a retirement annuity, and we get the details from Jan van der Merwe, the head of actuarial and product at PSG Wealth.

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Jan, thank you very much for your time. The most basic definition of annuity is this type of product that provides you with a regular income during your retirement. But tell us a bit more about how it works and when is the right time to buy one.

JAN VAN DER MERWE: Thank you, Fifi, and thank you for inviting me to your show. As for annuities, there are different types available in the market. The most widely used in the South African market at the moment is probably the vital annuity, which gives you the option of earning the income you receive with certain regulated minimums and maximums. Your annuity may be tied to the underlying investment performance of the funds you select. So that’s the only type of annuity.

On the other side of the scale, you get large annuities or guaranteed annuities provided by life insurance companies. Even these come with a guarantee for the rest of your life. They also have characteristics like increasing with inflation, increasing by a fixed amount.

And lastly, you get a combination of these annuities on the market. the hybrid type The annuity is the most common of these, generally referred to as a combined annuity, which provides both an investment component and a minimum. warranty provides you with the company of life.

FIFI PETERS: And when is the best time to get an annuity?

JAN VAN DER MERWE: That is a question that is specific to each individual. Therefore, each individual must evaluate their financial circumstances. What is also key is that the individual ropes in aid from a financial advisor, and if it is enough a liquid annuity, it can be quite a complex state. It is also quite a critical decision when you reach retirement age and are locking an annuity for years in your retirement. Therefore, obtaining financial advice is very important, considering your own financial circumstances.

FIFI PETERS: For example, if you are still of working age, if you are still a young person, maybe you even have a pension fund with the company you work for, would it be a good idea for you to get a retirement annuity on the side as well?

JAN VAN DER MERWE: That is one option. However, I believe that if you want to keep your financial affairs fairly simple, it is not key that you get an additional retirement annuity. I think the key consideration or factor is that you do everything you can to try and save as much as you can on any retirement annuity, be it your employer’s or a separate one, if you save as much as you can and make use of the tax benefits that the saving for retirement savers in South Africa.

FIFI PETERS: And what are the tax benefits?

JAN VAN DER MERWE: Within a retirement fund, whether it is a retirement annuity or simply saving with the employer, all returns on your investment and all capital gains, interest, and dividends are effectively tax-exempt. And you also get to a certain limit, now 27%, of your taxable salary, [which] It is not taxable if you put it in a retirement vehicle.

FIFI PETERS: At the other extreme, if you are approaching retirement age or, indeed, have just retired and are waiting to get paid into your pension fund, would it be a good idea to buy a retirement annuity at that stage, and Much of your pension should you put in an RA?

JAN VAN DER MERWE: There is a bit of confusion around the terminology. A retirement annuity is a savings vehicle that you use to save while you are still working. So a retirement annuity is a specific form of retirement fund, similar to that of your employer. So you save your retirement annuity, for example if you run your own business and it is not part of your employer’s fund. You can open a retirement annuity and when you reach retirement age, select an annuity which can be one of the things we discussed above.

FIFI PETERS: You may or may not have heard: Right now there is a conversation in the retirement industry about the introduction of the state security fund, in which all workers contribute a portion of their income. It’s something the state is looking at as a tool to create retirement stability in terms of income, so to speak. How does this work?

JAN VAN DER MERWE: There are currently a lot of governance initiatives around that, so currently there is a lot to think about that, and I think up to that stage [when] that becomes effective or the plans are a little clearer, many things would be happening exactly on that front. It is important for people to keep savings to the best of their ability in their own retirement fund, to ensure that they are in a position to retire comfortably.

FIFI PETERS: And then in terms of an RA, what are the top financial risks in retirement and how do you protect yourself from them?

JAN VAN DER MERWE: Probably one of the key risks is longevity. People are healthier these days with medical advances and healthier lifestyles so that people are living longer than anticipated. or compared to than in previous years. That is the only aspect to take into account. The other is inflation. So you want your annuity to keep pace with inflation and the cost of living to increase.

So in terms of longevity and inflation, it is important to speak with an advisor and see which annuity will suit you in the future. in terms of all these aspectral.

And when looking at a vital annuity as an example, it is important to select the correct underlying. investments and that means include some growth opportunities in the underlying fund to ensure that its growth keeps pace with inflation.

FIFI PETERS: And how much do retirement annuities typically cost?

JAN VAN DER MERWE: The costs are according to the product provided. But I think the important thing is to compare the costs when you start looking for an annuity, the total costs in terms of the EAC – the ‘effective annual cost’ – that is to say published by all product providers. That gives you a good idea of ​​the total costs. So that would include a tip if you get an advisor, it would include the administration fee as well as the vendor of the product and the initiation rate. And with all those costs, you will have a general idea of cost [but bear in mind that] you get different costs between different providers and also depending on the fund you select.

FIFI PETERS: And then, do you buy a retirement annuity as a single person or alone, or is there something that suits married people?

JAN VAN DER MERWE: The retirement annuity that you would buy as a single person is your own retirement savings. Later if you reach retirement [and you then] buy an annuity, certain annuities called joint life annuity are offered, so your annuity will be paid to you and your spouse, and then when you die, the annuity or part of it will continue to be paid to your spouse.

FIFI PETERS: Hmm. And the last savings advice you can give us? For many people, when they change jobs, it can be tempting to access what they have saved up to now in terms of their pension contributions. So what would you say to that?

JAN VAN DER MERWE: You have a very good point. It is very tempting to invest in your retirement savings when you change jobs, and in these difficult times, I would advise people to please do not dig into retirement savings and keep that pot growing as long as you can. As I mentioned earlier, make use of those tax incentives and keep your retirement pot dry.

FIFI PETERS: Thank you very much, Jan. I suppose that, as difficult as it is, you always have to think about the possibility of tomorrow and you don’t want to be in that tomorrow reluctantly.

That was Jan van der Merwe, Director of Actuarial and Product at PSG Wealth.


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