A Fin24.com user writes:I am going to retire in September 2011 after working for the same company for 37 years. My provident fund with Sanlam is valued at R1.7m.
How do I buy the best pension? Please explain to me differences as well as the drawbacks and advantages of living and guaranteed annuities. What else is available in the market?
A tax-free amount of R315 000 will be paid out. How can I invest it to earn a monthly income?
Also, should I pay off my property? I still owe about R350 000, although I'm paying R1 000 per month extra.
Arno Burger, a certified financial planner with Pretoria-based group Fidius, responds:Financial advice must consider all the facts about your personal needs and goals, while setting out the options which will suit your situation.
While you provide some information to consider, the following summary contains key details which are also needed to give proper advice:
- An overview of your complete financial situation, assets and liabilities, budget, term of income, your marriage situation, responsibility towards dependents and life expectancy.
- Availability of capital, emergency funds and income from other sources will play a determining role in the advice.
- Your requirements for flexibility and general knowledge of investment management, personal inflation patterns and risk profile will also have an influence when you have to decide between products like living and guaranteed annuities.
All of this information should be discussed during a consultation, and an adviser should then explain to you in understandable terms all the options which will work to your advantage.
We propose that you arrange an appointment with a certified financial planner. The process should be conducted according to the Financial Advisory and Intermediary Services Act (Fais), which determines that all your material information has been examined and gives guidance on the questions that need to be asked as well as the advice which should be discussed with you.
If you are happy with the adviser and the process, you can give the following instruction:
"Advise me on the handling of my provident fund at retirement, a suitable product and investment strategy, if needed, to achieve my goals in real terms in my investment term." You can then ask for written advice, with all costs and fees stipulated.
You also asked about the differences, benefits and drawbacks of living and guaranteed annuities. Below follows a comparative summary of each of these:
Guaranteed annuities- The investment belongs to the fund.
- Income will be determined by the fund, depending on your age, life expectancy and other statistical data.
- Income can't be adjusted according to your changing needs, and decisions on income have to be taken beforehand.
- Income is taxable in the hand of the investor.
- Income is guaranteed and continuous financial advice and guidance is not needed.
- The value of the investment and income is forfeited if the investor/annuitant dies after a guaranteed term - depending on the terms of the contract.
- Can't be converted to a living annuity - it will remain a guaranteed annuity permanently, in terms of the original contract.
Living annuities - The investment belongs to the investor, subject to certain rules.
- The income is determined by the investor, but is limited to 2.5% to 17.5% of the fund value.
- Income can be adjusted every year on anniversary, within the specified limits.
- Income is taxable in the hand of the investor, but growth within the fund is tax free.
- The correct income choices and exposure to asset classes for growth are the responsibilities of the investor - and continuous guidance is recommended.
- The investor decides how the value of the investment is distributed at death and there are many options available.
- Can be converted to a guaranteed annuity in the discretion of the investor.
Other options for getting a pension income will depend on the rules of your current employer's pension fund.
Which company should you choose? Once you have decided on the products that would suit you best, consider the institutional risks of the companies that offer the product. Make a shortlist of your preferred choices. A good adviser will help you compare cost, service and other considerations.
When considering where to invest the tax-free amount of R315 000, there is a big choice of options available which range from guaranteed investment to unit trusts and investments directly into shares or exchange-traded funds.
Depending on your income goals and risk profile, you have to insist on guidance to identify the most suitable option that will serve your needs over the whole investment term.
You should insist on written illustrations and comparisons, including a cash flow statement in real and nominal terms over the duration of your planning term. This will enable you to check the actual values over time and compare it at least annually to see that you are on the right track.
Finally – should you settle the outstanding amount on your home loan? It is usually a good idea to pay off all your debts before retirement. An adviser can do a calculation to demonstrate the effect of your decision.
- Fin24