Decoding Retirement: Navigating the D-Day Decision

The moment you stop working for good should be a celebration of freedom, not a day of judgment. Unfortunately, for many South Africans reaching the mandatory retirement age, the latter is often the case.

For most, advancing age means depending on government grants and support from family for survival once earning potential declines.

If you count yourself among those fortunate enough to have had stable employment—even in tough economic times—and an employer who assisted you in contributing to your retirement savings, still, you face one of life’s most significant dilemmas: what to do with those savings.

“That accumulated wealth is likely more than many of us have ever encountered,” says Fareeya Adam, CEO of Structured Products and Annuities at Momentum Wealth.

Regulations require that two-thirds of retirement savings be annuitized into a recognized income product from a compliant financial services provider, ensuring some peace of mind for clients through solvency ratios.

However, arriving unprepared to make crucial decisions about which product or combination best fits your needs poses a risk that could be minimized if retirees comprehend their options and align them accordingly.

Should you choose a living annuity or a life annuity? What should your drawdown rate be, within the range of 2.5% to 17.5%? Should you opt for a guaranteed term?

Adam emphasizes the importance of clients being empowered—through advisors, financial services providers, and the media—to grasp the implications of their choices and to make informed decisions.

The Mandatory Annuity Selection

In South Africa, there are two primary types of approved income products: living annuities and life annuities.

The main distinction between these two lies in the choice between flexibility and certainty, allowing clients to customize certain aspects within each category.

Simply put, a life annuity guarantees an income for the duration of your life, thereby guarding the client against longevity risk and transferring that risk to the insurer. If you lean towards certainty, this might be the option for you.

Conversely, a living annuity provides flexibility and investment control, but the risk of depleting funds—should you live a long life—rests with the retiree. This introduces market and longevity risks that can create significant stress regarding financial choices in later life.

If your preference leans towards a blend, various South African financial services providers offer a combination of living and life annuities.

For example, Momentum’s hybrid option enables clients to direct part of their retirement savings into a Guaranteed Annuity Portfolio within the living annuity, ensuring a secure, lifelong income stream. The remaining funds can be invested in flexible components, providing clients with growth potential, adaptable income, and legacy planning.

With the overarching goal of achieving sustainable income, additional retirement income choices should be influenced by what matters most to the retiree—be it income certainty, flexibility, growth, or ensuring financial support for loved ones after passing.

The table below categorizes some of the annuity considerations under the two main types, serving as a foundation for the questions a retiree should contemplate and discuss with their advisor when making decisions.

Client Priority	Living Annuity	Life Annuity
Sustainable Income for Life	Depends on drawdown rate and market performance. Longevity risk is borne by client.	Guaranteed income for life. Ideal if you expect to live longer than average.
Flexibility of Income	High flexibility. Choose drawdown rate (2.5% to 17.5%), adjust annually.	Fixed structure. Choose between level or increasing income (e.g., inflation-linked). No changes after selection.
Growth Potential	Invest across various asset classes for potential capital growth.	Designed for certainty, not investment performance.
Control Over Asset Allocation	High. Choose from available funds/portfolios aligned to your risk appetite. Regulation 28 does not apply.	None. Purchase price provides a guaranteed income product from the insurer.
Legacy (Income)	Any remaining capital after death can go to nominated beneficiaries.	Joint-life option ensures income continues to spouse or partner. Guarantee term provides income for the term, even if the original insured passes away.
Legacy (Lump Sum)	Remaining capital can be paid out, depending on market conditions and withdrawals.	Momentum’s Capital Protector feature ensures life cover equal to original amount is paid if you pass away early.
Health Concerns	Important factor in choosing investment risk profile and drawdown sustainability.	If in poor health, Capital Protector may offer more value and doesn’t require underwriting.
Minimum Return Assurance	No guarantees. Value depends on market returns and drawdown behavior.	Guaranteed term ensures minimum number of income payments, regardless of when the annuitant passes away.
Switching or Blending	Some providers allow a blend of a living and life annuity. Momentum allows a life annuity allocation from a living annuity at the starting point or later on.

Whether your focus is on certainty, flexibility, growth, or legacy, there exists a structure, or a blend, that aligns with your objectives.

Brought to you by Momentum Wealth.

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