The retirement ‘event’ is probably one of the biggest crossroads that we have in our lives, and the one time – however jaded and sceptical you may be about financial advice – that you really should seek professional advice.
By the time you reach retirement, your retirement investments are probably your single biggest asset, and mistakes made at this point ((like, potentially, putting capital into a living annuity) cannot easily be undone.
If you decide to put all your investments into a living annuity, then you’re stuck there, with just an annual review to change the income drawdown.
Read:
Retirement annuities: From tax deductions to the two-pot retirement system
The ‘perfect’ retirement lump sum: A costly mistake?
Remember too that once you put a living annuity into place, you have to take at least 2.5%, which is problematic if you decide (as many of my clients do) to semi-retire and still have an active income coming in.
In that case, your living annuity income will be taxed at your marginal rate. The South African Revenue Service (Sars) will be pleased, but your income will not.
Read: What after-tax income can I expect if I split my pension between a guaranteed and living annuity?
The first step is to gain a thorough understanding not only of your investments, but also of your current and future income needs.
You need a plan, and the best place for a plan to start is with you. It requires some heavy lifting and hard thinking about exactly what you want your retirement to look like.
I have written a four-part series, available here on Moneyweb, on doing your 2026 plan – which can easily evolve into your lifetime wealth plan. I have also consolidated these posts into a (free) eBook available on request.
There are parts of the wealth planning process that cannot be delegated to a planner – for example, your income and how you spend it.
Your planner can advise you on how to invest it to produce that income and make your ’consumption’ more effective (in terms of tax, over-insurance, fees, and so on), but you are the one living your best life with your wallet in your pocket.
Read:
Why is it so difficult to consolidate living annuities?
What are our best investment options to generate income and grow capital in retirement?
Where can I get the best fixed deposit with monthly interest payouts?
In my experience, it is always better to work with future retiree clients from the perspective of “how much income do you want or need” in retirement, rather than “this is how much income we can generate from what you have”.
One thing I cannot emphasise enough when it comes to income planning in retirement – you want the capital (whether invested in compulsory annuities or flexible investments) to produce a steady monthly income that grows with inflation (plus a bit more, thanks to the long-term exuberant medical aid inflation) and never runs out.
Longevity is real, and scenarios where capital exhaustion 20 years after retirement is quite acceptable (and, unfortunately, still practised in some corners of this profession) is dangerous.
Sure, it may mean that you have a higher income initially, but believe me, in 20 years’ time, when the retiree hits 85 and the capital has run out, the ‘advisor’ will be long gone.
This is a simple budgeting exercise, and if it’s something you haven’t done in a while, it can be very uncomfortable, but well worth the pain (and doesn’t need to be repeated endlessly either).
Read: Should I extend the maturity of my RAs or convert them to a living annuity at retirement?
Getting retirement investments to produce an income effectively, sustainably and tax-efficiently, requires some scenario planning and a good understanding of an individual’s circumstances, over and above the mere monthly income needs.
For example: other financial dependants, debt, medical aid contributions (which typically rise at a much higher inflation rate), long-term frail care needs, and capital needs such as new cars or changing housing.
A cookie-cutter approach, where income needs are rammed into an app where you have little control over the numerous variables, just doesn’t cut it.
In retirement, you need a professional who will tweak your retirement plan and keep it on track and aligned with your objectives.
This is one of the reasons I am not a huge fan of a ‘fee-for-a-plan’ model – it will be perfect on day one, but over time, without oversight, it will start to deviate – eventually leaving both the planner and the client disappointed and frustrated.
You’ll be happy to hear that living annuities are not the only way to generate an income in retirement.
In fact, I advise all my pre-retirees to diversify their streams of retirement income, because unforeseen expenses always come up, and a fixed income can make it very difficult to fund them at short notice.
Read: Preserving your retirement capital
It also means that you can maximise your annual tax allowances for interest and capital gains tax (CGT), and if there are two of you, you can split your investments (there is no donations tax between spouses) and take advantage of both your allowances. You cannot donate a living annuity; you can only bequeath it on death.
Because you get a tax break on your RA/pension contributions (27.5% of taxable income or R350 000 per annum), the income derived from an RA is taxed as income.
If you convert capital into an RA (as suggested by the reader), perhaps without the benefit of the tax break because you have gone over the annual cap, then you’re probably doing yourself a dirty from a tax perspective.
Read: The long game: Outliving your money is the real retirement risk
Sure, you can whittle down those ‘excess contributions’ over time, but you have now converted capital into income, perhaps at a 40-45% tax rate!
In short, I would recommend that anyone, including the reader, who is five to 10 years away from retirement should have a comprehensive retirement (and estate) plan put in place.
Not just a cookie-cutter app printout or DIY web programme that takes your investments, projects your additional contributions, and spits out a neat living annuity, oblivious to the nuances or your lifestyle expectations.
If you’re worried about being ripped off, do some research on fees. Anyone who would like a quick Zoom discussion on their retirement options is welcome to contact me while things are still relatively quiet on the home front.
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