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Preparing for retirement means taking steps to ensure that you have a reliable source of income that will last you for the rest of your life.
In the years before you retire you need to consider what your income needs are going to be post retirement, what retirement capital is available and what the payout options are at retirement. Ultimately you want to make the right decision and find a solution that will suit your needs and the lifestyle you'd like during this next chapter of your life.
An income annuity is a financial product that you buy with your retirement and pension fund savings when you reach your retirement age. It is designed to provide you with an income during your retirement years according to your personal needs. There are two types of annuities: Conventional Annuity and Living Annuity.
A conventional annuity provides an income for the rest of your life (or you and your partner’s life). Your income will stop if you pass away unless you have a joint annuity which comes to an end when the last surviving spouse passes away. Alternatively, you can choose a guaranteed income period that assures you an income for a specific period, and pays out regardless of whether you live or die during this time. After this guaranteed income period, the income will continue until you pass away, at which point it will stop. This is called a guaranteed or conventional annuity.
To help counter the effects of inflation (the rising cost of living) you can choose to have your income increase over time. But keep in mind that a higher escalation rate will mean a reduced starting income. There is a capital preservation option which preserves the initial retirement capital or a lesser amount chosen by you through a life policy, so that when you pass away the capital gets paid to your beneficiary.
The other type of annuity is called a living annuity which is linked to the market’s performance. Here, your capital is invested in the investment markets and you decide once a year how much of your investment you need to draw, be it a fixed rand amount or expressed as a percentage (within some limits). It’s important not to draw too much income at the start, so that you do not run out of money as you get older. You choose which funds your capital is invested in, based on your risk appetite, time frame and investment profile, determined through proper analysis and consultation with your financial advisor.
When you pass away, the remainder of your capital can be paid out to your beneficiaries.
Old Mutual offers the complete range of retirement income solutions to meet your specific lifestyle needs and circumstances and is a specialist in making these retirement income solutions work for you.
Old Mutual offers Max Income Bonus Escalation Guaranteed Annuity. This is a guaranteed monthly income with annual increases from bonuses, depending on market performance. This helps you by protecting the purchasing power of your income against inflation.
Old Mutual offers a Living Annuity invested in Old Mutual’s Absolute Smoothed Growth Fund. This is a market linked income, but without the highs and lows associated with market fluctuations. The smoothing mechanism reduces short-term ups and downs in market movements. This ensures a smooth increase of income with no sudden changes to your income and your lifestyle if markets suddenly become volatile.
This option is available on both Old Mutual’s Fairbairn Capital Retirement Income Plan and Max Investment’s Income Investment Funded Income.
A combination of guaranteed and living annuity is the Fairbairn Capital Retirement Income Safety Plan.
The Retirement Income Safety Plan combines the flexibility of a living annuity and the security of a conventional guaranteed annuity. It gives guidelines on how much income you should draw each year (known as a “draw down” rate). Income withdrawals within these guidelines will give you a greater chance of receiving a sustainable income for the duration of your retirement.
Should your investment value drop to a level that no longer generates a sustainable income, the safety features kick in automatically- you will then be moved into a conventional guaranteed annuity for the remainder of your life. So in short, the Safety Plan provides a pragmatic combination of a living annuity’s flexibility (through fund choice, market performance and leaving a legacy), with the security of a guaranteed annuity if that’s required. It has built-in safety features that protect you if the markets work against you.
To demystify the world of retirement income options, ask a financial advisor to explain the various options that are available to you, so that you can choose the solution that suits you best.
Speak to your Old Mutual adviser or broker today or call 0860 60 60 60.
Tel: 0860 60 60 67