Once A Week Cape Town, South Africa | How Does A Retirement Annuity Work
Retirement planning aims to align your financial choices with the life you are preparing for. Technically, you should guarantee that you will get a retirement income sufficient to fulfil your financial demands for as long as you live. This may seem like a tall order, but annuities were intended particularly for this reason. Choosing the correct annuity to provide you with a retirement income is crucial, but it need not be intimidating. By gaining a thorough grasp of the many annuity alternatives available at retirement and consulting with a financial advisor, you can make an educated decision that will allow you to enjoy the retirement you choose.
What Is A Retirement Annuity?
At the time of retirement, at least two-thirds of the entire fund profits must be used to purchase a retirement annuity. An annuity offers you a monthly income or pension throughout your retirement to meet your needs in retirement.
Various forms of annuities and their operation
Living annuities and guaranteed (or life) annuities are the two forms of annuities. The primary distinctions between these two annuities are the amount of control you have and the amount of risk you are exposed to.
Living Retirement Annuity
You have greater control with a living annuity but face the danger of running out of money.
A living annuity is an investment instrument; your assets are invested in a variety of funds to continue growing, and you may continue to receive a steady income for as long as there is money in the annuity.
However, the danger of a living annuity is that you may run out of money if:
- The markets perform badly, and the investment growth on your assets is insufficient
- You withdraw an excessively large income
- You live longer than anticipated.
This implies that living annuities are well suited for those who like to make their own investing and income decisions and are willing to accept more risk. In addition, since you control all of your investments, a living annuity enables you to leave any remaining funds to your beneficiaries upon your death.
Guaranteed Annuities
A guaranteed annuity provides less control but the assurance that you will get a lifetime income.
A guaranteed annuity is simply an insurance policy purchased from a life insurance company. In return for your retirement funds, the insurer guarantees to give you a fixed monthly income for life. The income amount will be determined by variables such as the value of your retirement savings, age and gender (relative to life expectancy), and product characteristics.
A conventional guaranteed annuity terminates at death, meaning the income payments cannot be transferred to beneficiaries. You exchange access to your funds for the assurance of a steady income stream. If you live longer, it is advantageous, but if you do not, it may not be advantageous for your estate.
Generally, guaranteed annuities are more appropriate for those who do not want the duty of managing their retirement funds and who value peace of mind more than freedom of choice and the option to leave any excess cash to their dependents upon death.
Choose Wisely
Although it is possible to transfer from one living annuity to another and from a living annuity to a guaranteed annuity, it is not possible to withdraw from a guaranteed annuity after it has been purchased. Therefore, it is essential to thoroughly analyse your choice.
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