Retirement choices: Making sense of the options

For most investors, investing for retirement is the longest-term financial endeavour they will undertake. Success depends less on finding the perfect strategy and more on sticking to a sound one. This calls for alignment between objectives and investment approach, along with an understanding that the journey is unlikely to be smooth. Markets will fluctuate, but a well-constructed plan anticipates volatility and is designed to withstand it.

Key principles during the accumulation phase

The accumulation phase lays the foundations of retirement. Small advantages – such as starting sooner, increasing contributions when possible, and remaining invested through uncertainty – compound meaningfully over time. Conversely, interruptions, delays, withdrawals and reactive decision-making erode outcomes in ways that are difficult to recover from later.

The changes made to the retirement fund system in 2024 under the two-pot legislation allow investors to access their savings component once per tax year, in case of emergencies. While the legislation grants some access, the aim of this system is to help members preserve their retirement investments. Pre-retirement withdrawals are heavily taxed and the impact compounds, resulting in a smaller nest egg. 

Factors to consider at retirement

While investing for retirement often happens on “autopilot”, the same cannot be said for the decisions investors need to make when retiring. At this stage, decisions become more complex and require careful consideration.

Key factors investors should consider include their assets and liabilities, income needs and desired lifestyle, tolerance for investment risk, and the appropriate withdrawal rate to ensure their income remains sustainable over time. Investors also need to weigh the trade-off between flexibility and certainty, understand the tax implications of different choices, and consider their health and life expectancy, particularly as they may live longer than expected and need their capital to support them throughout retirement.

What about a cash withdrawal?

Most retirement fund members have the option to take a portion of their benefit as a cash lump sum. In many cases, this may be up to one-third of the total, subject to fund rules and prior withdrawals.

This decision should be made in the context of an investor’s long-term income needs. The lump sum is a maximum allowable amount, not a target, and taking cash reduces the capital available to generate future income.

Lastly, taking a cash lump sum has tax implications. Having said that, tax plays an important role in retirement. Overall, retirement presents an opportunity to influence an investor’s overall tax outcome. But the interaction between tax, cash withdrawals and income sustainability can be complex and the trade-offs need to be considered.

Converting investment to income

The portion of a retirement investment not taken as cash must be used to generate an income, typically through annuity products such as a living annuity or a guaranteed life annuity.

Living annuity

A living annuity allows an investor’s money to continue to grow, depending on the performance of the underlying investments.

Investors have the flexibility to choose their income level within set limits and select the underlying investments, typically unit trusts.  Their capital remains invested and is influenced by market performance and withdrawals. This option may suit investors who value control, are comfortable managing the sustainability of their income, and wish to leave, and can afford to leave, remaining capital to beneficiaries. However, it also places the responsibility of managing longevity risk on the investor, making it essential to ensure that capital is sufficient to support income needs over a potentially long retirement.

Guaranteed life annuity

Alternatively, investors can insure their income by purchasing a guaranteed life annuity from an insurer.

A guaranteed annuity pays an income for life, regardless of how long an investor lives, can be structured to continue for a spouse and offers various options in terms of income increases and protection features. It is suitable for investors who want certainty that income will last for life, are less concerned about leaving, or cannot afford to leave, a legacy, prefer not to manage investments or make ongoing financial decisions and are comfortable with limited flexibility.

Default retirement solutions

Since 2019, pension fund trustees in South Africa have been required to provide default investment strategies and cost-effective annuity options for members at retirement. Recognising that no single solution fits all, trustees may offer more than one annuity option.

These options are not mandatory, but are available for members to consider carefully alongside other alternatives.

Guidance and advice

Retirement decisions are complex. Making use of educational resources – such as Allan Gray’s Preparing for retirement guide, available on our website – can help build understanding. Equally, guidance from an independent financial adviser can help align decisions with an investor’s personal circumstances and long-term objectives.