The big misconception about Living vs Retirement Annuities

Many investors assume that they must first retire from their employment, for many at the age of 60/65, before they can retire out of their retirement annuity and purchase a living annuity.

In a complex world, very little, if anything can be viewed in black and white. Especially regarding retirement.

When it comes to investment planning for retirement the two main phases are ‘pre-retirement’ and ‘post retirement’. The big misconception is the middle. The majority of South Africans view their retirement annuity as strictly ‘pre-retirement’, and a living annuity as strictly ‘post retirement’. Thus, they assume that they must first retire from their employment or work in general, for many at the age of 60/65, and then once each of these two conditions are both met simultaneously, they can retire out of their retirement annuity and purchase a living annuity. Simply, it does not have to be this way…

The big misconception lies in what is defined as the retirement age in South Africa, which is fortunately 55. Once you have reached the age of 55, regardless of whether you are employed or not, or whether you intend to retire in the short-term or not, you are eligible to retire out of a retirement annuity and use the proceeds to invest in a living annuity.

Considering the high tax burden on income earning South Africans, tax benefits should never be ignored. There is a simple solution – investors can retire out of a current retirement annuity at 55, use the proceeds to purchase a living annuity, while at the same time can open a new, ‘smaller’ retirement annuity to contribute to until age 65, and take advantage of the tax cuts offered by retirement annuities whilst still working post 55.

Once the investor officially retires, say at 65, they can once again then retire out of the second, smaller retirement annuity, and add the additional proceeds to the existing living annuity. Thus, for the years post 55, whilst you are still working, you can look to maximise the growth of your retirement funds.

The flexibility this option offers is an important point to consider for retirement planning, especially for those who want more control over their retirement savings, greater access to other markets, and more freedom in deciding on where to invest their hard-earned money.

Financial success starts with good saving habits. Our Financial Experts have been unpacking and providing practical advice on the best ways to preserve YOUR financial freedom. Contact our Financial Advisors to ensure that you are receiving Shariah-Compliant Finance advice.

Anglowealth is an Authorized Financial Service Provider (FSP Number: 46755)

Source: (Moneyweb, 2022)


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