Should I invest R500k in a life annuity to supplement my monthly pension?


Dear reader,

Structuring the most effective retirement portfolio is one of the most important decisions you will ever make. This not only involves making sure that you choose the optimal investment vehicles, but also making sure that your investment strategy is correct. The retirement investment strategy is crucial because you need to make sure that your capital will last as long as possible. This is especially important when planning for retirement, as statistics show people are living longer. Women also tend to outlive men by four to five years in South Africa. Therefore, your retirement income may have to last another 30 or 40 years after retirement age.

First of all, remember that you can access the first R500,000 at a 0% tax rate, but only if you have not made any withdrawals or received severance pay before (since the pension benefits are accrued for tax purposes). I do not advise withdrawing more than this component at retirement, as withdrawal greater than R500,000 will be taxed. The 500,000 Rand can be placed in an accessible investment and, depending on your income needs, monthly income can also be drawn from this investment. Or you can choose to use this investment as an emergency fund or for any other unforeseen or additional monthly expense that may be required.

The rest of the funds (above R500,000) can be reinvested in a life annuity, as you mentioned.

I prefer a life annuity (as opposed to a retirement annuity) for several reasons.

Above all:

  1. You can designate beneficiaries, so if something happened to you, your relatives would take care of the investment income.
  2. You have the advantage of being exposed to the market. If you diversify your portfolio properly, you will benefit from higher returns.

You can be protected against the vagaries of market cycles by optimal diversification and active management by your advisor.

Choosing an appropriate investment strategy for a life annuity will be important in ensuring you plan for longevity. If you pull too high a percentage of income or the investment asset allocation does not produce a high enough return to accommodate inflation and income withdrawals, you may deplete / outlast your funds.

Sharia-compliant funds are still quite limited in our country. The advantage of reaching the retirement stage and transferring your retirement funds to a life annuity is that Regulation 28 of the Pension Fund Act no longer applies. Regulation 28 limits you in the pre-retirement phase with respect to your offshore exposure and equities. Depending on your ability and tolerance for risk, this may be advantageous with a life annuity and voluntary investment, as you may have more exposure to equities as well as more exposure to money. stranger in your wallet. This can help increase returns, but can also increase the volatility of your investments.

Sharia law prohibits investment in many stocks generally included in mutual fund portfolios because these funds are strictly managed in accordance with Sharia law (Islamic law) and therefore do not invest in stocks of companies whose main activity is is to negotiate non-halal food products. or interest-bearing instruments.

There are a few Sharia-compliant funds to consider, so the right balance between equity funds and your risk appetite is important.

The optimal strategy is to combine an income-based portfolio (consisting of Islamic bonds) for your income withdrawals and short-term needs, as well as equity portfolios for long-term capital growth. A balanced approach can also be included between the income strategy and the capital growth strategy.

A retirement strategy might look like this:

The Old Mutual Albaraka Income fund returns (for income needs in the first 2-3 years):

The Old Mutual Albaraka Balanced Fund returns (for income requirements from the 3rd to the 6th year of retirement):

Finally, the Old Mutual Albaraka Equity fund (for income conditions from 6 years old until retirement):

I am specifically referring to Old Mutual’s Albaraka funds in this article. There are, however, other suitable Sharia compliant funds that can be used in the investment strategy.

I advise you to speak to a wealth advisor to structure the optimal retirement strategy for you. Annual rebalances will be carried out to ensure that the original strategy is maintained, ensuring that low risk income requirements are met, but also ensuring that sufficient exposure to equities is structured for growth in the market. long-term capital.

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