By Tkay Nthebe
Retirement planning conversations remain a taboo topic and are often left till it’s too late. The consequence of this is people retiring with inadequate capital to buy an annuity. In this article, I speak to Teboho Makoetlane (TM), a Pension and Insurance Management Consultant about retirement and annuities.
TKay: Ntate Makoetlane, what are annuities and why should someone purchase one?
TM: An annuity is a fancy way of saying “scheduled post retirement income”, Having annuities means you have properly planned how far your pension or provident fund can take you, when you go for retirement. This helps to avoid a situation where the retiree spends all his/her money in a short space of time and ends up not being able to afford daily life expenses.
TKay: There are different types of annuities available, can you discuss these?
TM: There are different types of annuities to choose from for example, Fixed Annuities: Which provides a fixed amount determined at a rate of interest. It pays until death with an option of single life or joint life. Both the single and joint life options have Capital preservation and guaranteed periods to ensure that that there is a payout to dependents if the policyholder dies early. The alternative is a Living Annuities, where the investor chooses if they want to receive income on a monthly, quarterly, bi-annually or annually. The income level must not be less than 2.5% but not more than 17.5% per annum.
TKay: What should one consider when preparing to buy an annuity?
TM: There are three very important factors that will make annuity conversations make sense. Firstly, you need to save at least 15% of your monthly income, invested for a minimum of 30 years to retire comfortably. Given that inflation erodes the value, the return on the investment should be inflation plus 4% to preserve the value of your money. Secondly, you have to consider other alternative sources of income you have in place at retirement such as rent from “malaene”, farming activities etc. Your estate intention is the third consideration, do you want to leave anything for anyone when you die post retirement?
TKay: The belief is that Annuitants receive very little income from annuities. Is this true and how should one prepare?
TM: The truth is that an annuity depends on how much capital you have, which is influenced by your contributions and investment performance. If your savings are small, the annuity will also be small.
TKay: So TKay is changing jobs and he cashes out the terminal benefits. Why is preserving retirement funds important?
TM: It is important to preserve your retirement capital every time you change jobs. By so doing you benefit from compounding interest, thus preserving the value of your fund. Furthermore, people are living longer where they retire at 60-years but live until they are 80-years old. This means that you actually need more money to retire. Let’s do a quick example, let’s assume your only monthly expenses in retirement are a basic medical aid cover plan of LSL1,000.00 and LSL 1,000.00 groceries. You will need at least LSL 480,000.00 capital to cover these expenses for 20-years post retirement. That’s a big amount.
“If you haven’t started planning for retirement, look at your parent’s retirement story. If you do not like the story, then speak to a Financial Advisor now”. Teboho Makoetlane
NB: Alliance has an Employee Benefits department that can advice corporates, companies, boards of trustees and human resources managers on different options available for pension and provident fund administration. Call us on 22215600