More than 85 percent of retirement fund members buy a living annuity with the savings in their funds when they reach retirement, Ashleigh Davies, a consultant at Old Mutual Corporate, told the recent Institute of Retirement Funds Africa conference.
A living annuity allows you to choose the underlying investments and draw a pension from these investments of between 2.5 percent and 17.5 percent of the capital value.
However, Dante Sinibaldi, the managing director of Redwood Unlimited Financial Services, told the conference there are very serious risks to investing in a living annuity, one of which is outliving your capital.
Davies says people tend to dismiss the huge risk of longevity.
Sinibaldi says the other risks are poor performance by investment markets and your income not keeping pace with inflation.
He says that, without proper financial advice, you can quickly decimate your capital and your means of generating a pension.
Sinibaldi says high fees are also a risk. Administration, asset manager and financial adviser fees can be as high as four percent (including VAT) a year.
The alternative to a living annuity is to buy a guaranteed annuity, which guarantees you a pension for life. These annuities typically have a guarantee period, and if you die before the period is up, the annuity will be paid to your beneficiaries until the end of that period.
If you (or your spouse, in the case of a joint annuity) die after the guarantee period, no further pension or residual capital will be paid to your heirs.
Sinibaldi says it may suit you to blend a living annuity and a guaranteed annuity, but you should find out the pension you will receive in rands under different market conditions.