1 month ago
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Question: I’ll be turning 58 in just over a week. I have my pension money in a preservation fund until age 65. Here are two questions I have:
- I would like to draw an income, but as I only turn 65 in seven years’ time, is a life annuity recommended?
- Can a life annuity be structured to include a beneficiary who is not a spouse?
Answer: Even though you set a retirement date of 65 when you took out your preservation fund, you may retire from that fund at any stage from the age of 55. As you are 58, you may retire from this fund immediately.
If you have not made a withdrawal from this preservation fund, you may take out R25,000 as a tax-free withdrawal. This is advantageous, as any income from this lump sum will only be taxed as a capital gain, which is taxed at a lower rate.
If you then retire from this fund, you may take out up to one-third as a lump sum and the balance must be used to buy an annuity. The lump sum that you take will be taxed according to a special table for lump-sum withdrawals from a pension fund.
Life annuity
There are a few factors that play a key role when it comes to calculating the amount of income you can get from a guaranteed life annuity. The two key variables are the prevailing long bond rates and your age.
The long bond rates have been decreasing over the past few weeks, but they are still significantly above pre-Covid levels.
We do not know what they will be like in seven years’ time if you retire at 65.
To illustrate the impact age makes, here is an example of a 58-year-old versus a 65-year-old investing R1-million in an annuity:
Although you would get a higher initial annuity at 65, the life annuity is still good value for a 58-year-old, as you are locking in a return of 11% for the rest of your life.
If you invested in a living annuity, you should be drawing down no more than 4% a year as a 58-year-old. So, for a R1-million investment, a sustainable monthly income would be about R3,300 as opposed to the R6,500 that a life annuity would give you.
Joint life annuities
You can take out a joint life annuity that will pay out an amount until the last person dies.
You can have a joint life annuity with someone who is not your spouse. Remember that the starting pension will be impacted by the age and gender of the second life. If the second life is younger than you are, or if the second life is a woman, the starting pension would also be lower because women live longer than men.
When the first person dies, you can have the annuity remain the same or reduce to 50% or 75% of the current amount. The size of the decrease will have an impact on the starting amount that you receive.
You need to ensure that you have sufficient income to meet your long-term needs. Remember that one in 10 of us is going to live to 100, so your pension must be robust enough to last for another 40 years. I would recommend that you get some specialist advice before making any big decisions. DM
Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.
