Wednesday, January 26

Should I invest R500k in a vital annuity to supplement my monthly pension?

Dear reader,

Structuring the most efficient retirement portfolio is one of the most important decisions you will make in your life. This includes not only making sure that you are choosing the optimal investment vehicles, but also making sure that your investment strategy is correct. The investment strategy at retirement is crucial, as you must ensure that your capital lasts as long as possible. This is particularly important when planning for retirement, as statistics show that people live longer. Women also tend to live longer than men for four to five years in South Africa. Therefore, your retirement income should last perhaps another 30- or 40-year investment period after your retirement age.

First of all, remember that you can access the first R500,000 with a tax rate of 0%, but only if you have not made withdrawals or received severance pay before (since retirement benefits are added for tax purposes). I do not recommend taking out more of this component at retirement, as withdrawal above R500,000 will be taxable. The R500,000 can be put into an affordable investment and depending on your income requirements, a monthly income can also be earned from this investment. Or you can choose to use this investment as an emergency fund or for any other unforeseen or additional monthly expenses that may be necessary.

The rest of the funds (above R500,000) can be reinvested in a vital annuity, as you mentioned.

I prefer an annuity (rather than an annuity at retirement) for several reasons.


  1. You can nominate beneficiaries, so in case something happens to you, your loved ones will take care of the investment income.
  2. It has the advantage of having exposure to the market. If you diversify your portfolio correctly, you will benefit from higher returns.

You can be protected against the downsides of market cycles through optimal diversification and active management by your advisor.

Selecting a suitable investment strategy within a vital annuity will be important to ensure that you are planning for longevity. If you get too high a percentage of income, or if the investment asset allocation does not produce a high enough return to accommodate inflation and income withdrawals, it can deplete / deplete your funds.

Sharia-compliant funds are still quite limited in our country. The benefit of reaching the retirement stage and moving your retirement funds to a vital annuity is that Regulation 28 of the Pension Funds Act no longer applies. Regulation 28 limits you in the pre-retirement stage with respect to your offshore and equity exposure. Depending on your risk capacity and tolerance, this can be beneficial within a vital annuity and voluntary investment, as you may have more exposure to equities, as well as more exposure abroad within your portfolio. This can help increase returns, but it can also increase the volatility experienced by your investments.

Islamic law prohibits investment in many of the stocks normally included in unit trust portfolios, as these funds are managed strictly in accordance with Islamic (Shariah) law and therefore do not invest in company stocks whose primary business involves trading non-Halaal food products. or instruments that accrue interest.

There are some Shariah compliant funds to consider and therefore the correct balance between equity funds and your appetite for risk is important.

Combining an income-based portfolio (consisting of Islamic bonds) for your income withdrawals and short-term needs, along with equity portfolios for long-term capital growth, is the optimal strategy. A balanced approach between income and capital growth strategy can also be included.

A retirement strategy could possibly look like this:

The Old Mutual Albaraka Income fund returns (for income requirements in the first 2-3 years):

The Old Mutual Albaraka Balanced fund returns (for income requirements in years 3-6 of retirement):

Finally, the Old Mutual Albaraka Equity fund (for income requirements from 6 years of retirement):

I refer specifically to Old Mutual’s Albaraka funds in this article. However, there are other appropriate Shariah compliant funds that can be used in investment strategy.

I would advise speaking with an wealth advisor to structure the optimal retirement strategy for you. Annual rebalances will be performed to ensure that the original strategy is maintained, ensuring that low-risk income requirements are met, but also ensuring that sufficient equity exposure is structured for long-term capital growth.

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