Question:
After my retirement age, when I start receiving my pension on the sum saved, say R1m, will I be paid the monthly interest on the amount or the pension funds itself? Also, upon my death when my pension is transferred to my spouse, are there any commission takes to be paid by her? And what happens to the remaining funds upon her death? In addition I'd like to know whether my children will be paid the interest or the capital amount? Please advise. As a self-employed person, I want to invest in a retirement plan which will be safe and secure for me, my spouse and the children.
Answer:
Sanjay,
On retiring from a pension, a pension preservation or a retirement annuity fund, you "must" use at least two-thirds of your fund proceeds to purchase an annuity. As a member of a provident fund you "may" use all or a part of your fund proceeds to purchase an annuity.
By buying an annuity you defer and most likely reduce the tax due on your retirement savings as you are only taxed on the annuity income you receive.
You can choose between two types of annuities: a guaranteed (or conventional) annuity or an investment-linked life annuity.
A "guaranteed annuity" is essentially an insurance product that protects you from longevity risk (outliving your savings) and investment risk (poor or insufficient investment returns). It provides you with a specified monthly pension for the rest of your life (and, if applicable, your spouse's life, if you buy an annuity with a spousal benefit, although this will pay out less). No money passes onto your heirs, the capital dies with you (or with your spouse, if you opt for the spousal benefit). Your children will not be protected with such a policy (most children are financially independent by the time their parents retire). You must purchase this annuity from a life assurance company. You cannot purchase a fixed term annuity.
The "living annuity" is essentially an investment product. You assume both the longevity risk and the investment risk, the onus is on you to secure an adequate income for life. You run the risk of depleting your residual capital during you lifetime. In return, you have greater flexibility and control over your financial affairs: you decide how to invest your savings and how much you draw down every year. Plus any remaining capital after your death accrues to your nominated beneficiaries (i.e. if you wish, to your wife and children).
Annually, you must draw down at least 2.5% but no more than 17.5% of your residual capital (as at the Policy Anniversary date). Your draw-down rate can change from year-to-year. You can choose to receive your annuity income
monthly or quarterly, six-monthly or annually.
The amount of your annual income is not guaranteed. If your requested draw-down exceeds 17.5% of your Residual Capital, you will receive less than requested and may experience a drop in living standard. Your Residual Capital is affected by your investment return (which can be positive or negative), the fees you pay and the amount you draw down every year.
If your Residual Capital drops below R75 000 (R50 000 if you took the one-third cash lump sum at retirement), you may cash in the entire residual.
Your nominated Beneficiaries inherit what is left of your capital after your death, per the instructions in your Beneficiaries nomination form.
