What is a Retirement Annuity?

A retirement annuity or RAis typically the term used to describea financial product into whichyou contribute while you are working and earning a salary in order to accumulate retirement funds.

When the time comes for you to retire from the fund, no less than two-thirds of the retirement valuehas to be used to invest inor buy an annuity which will continue paying you an income into your retirement.

With a fixed annuity, also known as a life annuity, your lump sum effectively buys you a set income and the type of annuity you buy will determine when it will stop paying out.

The two most common annuities are a single life annuity and a joint life annuity.

• A single life annuity will continue paying you an income for as long as you live, if howeveryou should die in the fifth year, the life company will retain the money.
• On the other hand,should live to the ripe old age of 100, they will have to keep paying.

With a joint life annuity, you can insure your spouse, in which case if either of you should die, the surviving spouse will continue receiving the income.

Life companies can offer several variations of these, with different guarantees.These vary from company to company, so it is certainly worth investigating and determining exactly what you are buying.

Here are a few ofthe more common options from Alexander Forbes:

Fixed Annuity –

• No annual increases, however, you have an option to choose a flat annual increase (3%, 5% or 10%)which will reduce the initial income you receive.
• The pension will be paid for as long as you live.
• Advantages: If no annual increase is chosen, the initial pension is higher. The pension is paid for
  life. Your spouse will receive a pension upon your passing.
• Disadvantages: Income will not increase and so doesn’t keep up with inflation, unless chosen.
  You will not be not able to adjust your income level as time passes.

With-profit Annuity –

• The insurance company decides on annual increases which will depend on investment performance.
• The pension will be paid for as long as you live.
• Advantages:The initial pension and increases declared by the insurer are guaranteed for life. The insurance company takes the risk of possible poor investment performance. The pension is paid for life. Your spouse will receive a pension upon your passing.
• Disadvantages: You have no say in where your money is invested. Pension increases can be low or even 0% should markets perform poorly.

Inflation-linked Annuity-

• Increases are based on inflation during the year.
• The pension will be paid for as long as you live.
• Advantages: Your income keeps up with inflation and is protected against increases in the cost of living. Your spouse will receive a pension upon your passing.
• Disadvantages: The pension increases can be low or even 0% if inflation is low or 0% respectively.

Living Annuity –

• You decide on the level of income you require every year with a financial advisor (Anything between 2,5% and 17,5% of the investment value).
• Advantages:Flexibility. You decide where to invest your money and choose your own income level.
• Disadvantages: You carry the risk of poor market performance with no guarantees. There is a risk of outliving your money, that is the risk of you living much longer than expected and drawing too much income early on.

Alexander Forbes Lifestage Annuity –

• You decide on the level of income you require every year with a financial advisor (Anything between 2,5% and 17,5% of the investment value).
• Advantages: Annual checks are done to see when may be best to annuitise however you do have an option not to. Once annuitised there is no chance of you outliving your money as the pension is guaranteed for life and your spouse will receive a pension when you pass away.
• Disadvantages: Before you annuitise you carry the risk of poor performance as there are no guarantees. If you choose not to annuitise you run the risk of outliving your money, similar to the living annuity above. After you annuitise, there will be no money left for an inheritance for family.