Dear reader,
I would like to first clarify the difference between retirement fund products and retirement income products. Retirement fund products include pension funds, provident funds, retirement annuities and preservation funds. All four of these products are used to save for retirement.
Retirement income products include the life annuity and the living annuity. Recently, a hybrid annuity, which essentially combines the life annuity and the living annuity, has also become an option. Retirement income products are used to draw an income from to provide a retiree with their post-retirement income.
With retirement fund products, it is not possible to withdraw a monthly income. Pension and provident funds are retirement fund products that can only exist between an employer and an employee. A retirement annuity is a retirement fund product that exists between an individual and a retirement product provider such as Momentum, Liberty and Allan Gray. There are of course many more product providers on the market.
Unlike a pension or provident fund that can only exist if the employer has taken it out for its employees, anybody can take out a retirement annuity.
The preservation fund is a product that is used when an employee of a company has a pension or provident fund, leaves their employer and now needs somewhere to invest their pension or provident fund value. The individual can then preserve their pension or provident fund value in a preservation fund. The fund value is not taxed when being transferred from a pension or provident fund to the preservation fund. Ultimately, all four products are used for the same goal – to save for retirement.
At retirement, you would then use your retirement funds to implement your retirement income plan. It is possible to combine various retirement funds into one retirement income solution.
A life annuity is where you purchase a guaranteed annuity/income from a product provider (such as Sanlam, Old Mutual and so on). This income will continue for life. You can then select your annual income escalations, a guaranteed term and whether you would like your spouse to receive an income after your death.
A guaranteed term determines the minimum number of years that the annuity will be paid out for. Selecting a guaranteed term is optional. If the guaranteed term is 10 years, for example, then should the annuitant pass away in year three, the annuity will continue to be paid out to the nominated beneficiaries until the 10th year is complete.
It is important to note that the annuity income for a female is lower than the annuity income for a male when all other factors are the same – because females have a longer life expectancy than males.
Therefore, from the perspective of the product provider, they will, on average, be paying out an annuity income to a female for a longer period, compared to a male.
In your question, it is not specified whether you are male or female. I have therefore included both scenarios below.
I have also included a five-year guaranteed term and inflation-linked annual income escalations. I have also only provided income estimates assuming there is no income for a spouse on your death.
If we consider investing the R2 985 000 into a life annuity, the before-tax income you can expect is:
| Gender | Income for spouse | Income growth rate | Guaranteed term | Before-tax income per month |
| Male | No | Inflation-linked | Five years | R17 063 |
| Female | No | Inflation-linked | Five years | R15 275 |
The above figures are based on current annuity rates. Please note that annuity rates change on a weekly basis.
Another retirement income product that is available is the living annuity. This is where you invest your retirement savings and draw an income of your choosing. You can take a minimum of 2.5% and a maximum of 17.5% annually, of the capital value, as income. This income can be paid monthly, quarterly, bi-annually or annually. And you have the option to change this income on an annual basis.
The recommended drawdown rate at inception of a living annuity is 5%. Of course, this percentage is not set in stone, but if we use the 5% drawdown rate, then an investment value of R2 985 000, would provide you a before-tax monthly income of R12 438. If we assume a 5% income growth rate and an investment return of 9% per annum, you would then continue receiving an income from your living annuity for approximately 25 years.
