Leruo Retirement series: To buy an annuity or not to buy when I retire?

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By TKay Nthebe

In my role as a personal finance coach, I work with several clients who are preparing to retire. What I’ve realised is that many are terrified about retiring, because of many financial decisions and products to choose from – which is often overwhelming. One such financial decision is ‘should I buy an annuity or not?’

In this week’s article, I discuss annuities and why you should consider them.

What is an annuity?

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In simple terms, an annuity is the monthly income that you receive post retirement to take care of your monthly living expenses such as groceries and medical expenses for example. To purchase an annuity, the capital a member of pension or provident fund  has built and accumulated over their working life is used.

What are the different types of annuities?

To retire financially secure, members can choose from different annuities which are either fixed or living annuities. With the help of professional financial advisors, members of pension funds are allowed to cash out up to one-third as a cash lump-sum and two-third used to purchase annuities, while members of provident funds can cash out 100% or use part of it to buy an annuity.

As explained in the article “Annuities guarantee your livelihood”, a fixed annuity (pension income) allows members to receive a fixed amount determined at a rate of interest. A fixed annuity can be a single life or joint life where a member is guaranteed to receive pension income for a guaranteed period of 15 years for example. Should a member die before the guaranteed period is over, he/she can nominate his/her beneficiaries or elect for the benefits to be paid out to their spouse. Furthermore, a member can choose for his or her annuity to escalate so it keeps up with inflation.

Where a member opts to purchase a living annuity, they are allowed to draw a minimum of 2.5% and maximum of 17.5% of their retirement capital per annum. Should annual performance be bad when members withdraw, the risk of longevity can lead to them outliving their retirement benefits. Understanding how retirement benefits are invested is thus important.

Should I buy an annuity?

When answering this question, members of retirement funds should consider which annuity is most suitable to address their retirement needs. Firstly, to ensure members make informed financial decisions, they should educate themselves on different kind of annuities available, the advantages and disadvantages of each. Secondly, the misconception that retirement conversations should only start at the age of 55-years needs to change, because planning for a financially secure retirement starts on your first day at work – you aren’t too young to start planning for retirement. Lastly, choosing a suitable annuity requires that you seek professional advice from a licensed financial planner or advisor. Should you require additional information, speak to your broker, or visit Alliance Insurance at www.alliannce.co.ls.