YOUR MONEY: About to retire? Think carefully about all those annuities

Question:

I am retiring at the end of 2023. I have some money in (a) a preservation fund from a previous employer, (b) a current annuity with one of the large insurers and (c) a pension fund with my current employer. My questions are:

1. Can I pool all the money and buy a single life annuity for myself?
2. Can I pool all the money and buy a single life annuity for my wife?
3. Can I pool all the money and add some of my savings and then buy a single life annuity for my wife?  

- Chris 

Answer:

It is good that the reader is grappling with his retirement options now, even though he is retiring in eight months. There are several decisions that retirees need to make at the point of retirement and some are irreversible. While I will attempt to answer his questions, I am dealing with incomplete information, so this response cannot be construed as advice.

Question 1:

Yes, this is possible with the preservation fund and the pension fund. Depending on which annuity he has with the insurer he may, or may not, be able to collapse it into the same life annuity.

Whether it is the right thing to do is an entirely different question. Life annuities are perfect for retirees who wish to secure retirement income for life. However, they are inflexible, and once a retiree buys an annuity, he cannot exit it or change anything in future. The insurer may also amend the income if it has experienced poor investment returns within the risk pool.

With a life annuity the capital dies with the annuitant. However, the reader can include a spouse benefit stating that the insurer has to pay a percentage of the income he was getting to his spouse for the remainder of her life.

He can consider a hybrid annuity, which offers the income security of a life annuity and the flexibility of a living annuity.

Question 2:

No, and yes. It is not possible to change the name of the owner of the retirement products, so he cannot transfer the ownership to his wife. He would have to disinvest from the preservation and pension funds, pay a potentially enormous amount of tax and donate those funds to his wife (tax free). She would have to invest them in a retirement annuity and then retire out of the annuity into a life annuity. This is totally inefficient, as a lot of capital would be lost to taxes and transaction costs.

Question 3:

See answer to question 2. However, the reader can give some of his discretionary investments to his wife.

She must buy a retirement annuity first, then retire out of the annuity and buy a life annuity with the proceeds. There won’t be any leakage to tax. His wife will also receive tax-free income until she uses up her disallowed contributions.

In principle it is good to split incomes between spouses to benefit from two rebates and other exemptions. If the reader hasn’t withdrawn his tax-free portion when he went into his current annuity he could boost his discretionary cash by doing so. If he has, he may have an additional R50,000 that he can draw tax free after the recent amendment to the retirement tax tables. 

He would do well to consult a certified financial planner with the right qualifications and experience.

— Craig Gradidge,  investment and retirement planning specialist at Gradidge Mahura Investments

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