Question:
I'm 48 and took a voluntary package. I was advised to put my pension fund in a living annuity. Is this good advice?
Answer:
Sam,
We cannot answer whether a living annuity is a good idea for you or not, as we would have to do a full financial needs analysis, to answer this.
But generally speaking, a living annuity is a post-retirement product, for people, who have retired. It comes with certain restrictions and conditions, including that you have to draw at least 2.5% of the Residual Capital per annum. The fees and broker commissions on this product also tend to be quite high. If you go back to work, that annuity income will be taxed at a higher marginal tax rate than in retirement.
If you plan to keep working, then you should rather consider moving your money to a low cost preservation fund until you do decide to retire. You could invest your money the same way, but you would not have make a compulsory withdrawal every year. In fact, you would be limited to just one (full or partial) withdrawal before your retire (earliest age 55). You can still transfer from a preservation fund to a living annuity once your retire,
When you take out a living annuity, you assume both investment risk and longevity risk. This means that you assume the risk of negative, poor, or below inflation investment returns and depleting you capital this way. And you assume the risk of potentially outliving your capital. But in return you have more flexibility in terms of how your money is invested and your annual income (compared to a guaranteed annuity).
Retiring at age 48 does not seem like a good idea, as your savings have not come to full fruition, yet they have to last longer than normal (compared to someone retiring at age 65). We would therefore caution against moving your money into an annuity (living or guaranteed) just yet and putting your feet up.
