The difference in income received if Andile retires five years later is R9 323 per month (R23 070 – R13 747 = R9 323). So, if he chooses to retire early at age 55, he will have less retirement savings available and he will also receive less income from a guaranteed life annuity.
If, despite the early retirement shortfall, Andile still chooses to retire early from his pension fund because he is not able to postpone his retirement, there are a few post-retirement options available to him. Based on the same previous assumption that there is a capital growth rate of 10% per annum in the pension fund, without any increase in Andile’s contributions, we have provided three post-retirement options for Andile which offer varying levels of flexibility.
Option 1:
100% in a guaranteed life annuity with a 20-year guaranteed term and an assumed 5% annual growth on income.
Option 2:
100% in a living annuity with the same income as Option 1. We have assumed income growth at 5% and capital growth at 9% per annum.
Option 3:
Andile’s capital could be split as follows:
- R1 500 000 in a guaranteed life annuity with a 20-year guaranteed term and 5% annual growth on income; and
- R1 195 130 in a living annuity with income that would match the income in Option 1 and 2 if combined with the income from the guaranteed life annuity.
Each option would provide Andile with the same income annuity amount, but the third option will provide him with a guaranteed lifetime income and the opportunity to preserve some capital on the side as well.
The table below illustrates an example of the outcome of each option at age 55, with retirement capital of R2 695 130, assuming an income growth rate of 5% and a capital growth of 9% (inflation + 4%).
| Product | Capital invested | Income | Capital/Income available at death |
|---|
| Option 1 | Guaranteed Life Annuity | R2 695 130 | R13 534 that grows with 5% per annum | If before 20 years: income continues to pay to the beneficiary |
| Option 2 | Living Annuity | R2 695 130 | R13 534 (6%) that grows with 5% per annum
Capital growth assumption of 9% per annum | Capital in the investment is available to the beneficiary |
| Option 3 (Combination) | Guaranteed Life Annuity
Living Annuity | R1 500 000
R1 195 130 | R7 644 that grows with 5% per annum
R6 103 (6%) that grows with 5% per annum
Capital growth assumption of 9% per annum | If before 20 years: income continues to pay to the beneficiary
Capital in the investment is available to the beneficiary |
If Andile waits another five years and retires at age 60, when the capital has grown to R4 591 616, the outcome of each option will be as follows:
| Product | Capital invested | Income | Capital/Income available at death |
|---|
| Option 1 | Guaranteed Life Annuity | R4 591 616 | R23 070 that grows with 5% per annum | If before 20 years: income continues to pay to the beneficiary |
| Option 2 | Living Annuity | R4 591 616 | R23 070 (6%) that grows with 5% per annum
Capital growth assumption of 9% per annum | Capital in the investment is available to the beneficiary |
| Option 3 (Combination) | Guaranteed Life Annuity
Living Annuity | R2 000 000
R2 591 616 | R13 031 (6%) that grows with 5% per annum
Capital growth assumption of 9% per annum | Capital in the investment is available to the beneficiary |