What Is A Retirement Annuity

What Is A Retirement Annuity – Retirement annuities provide guaranteed income over the final years. This may seem like the solution you need — especially if you don’t know how long your savings will last. But like any financial strategy, annuities have their drawbacks. To avoid unpleasant surprises later, it’s wise to evaluate those pitfalls before locking your money into an annuity.

Here’s a closer look at retirement annuities, including what retirement annuities are, what types you can buy, their best and worst features, and how they compare to other strategies of retirement income.

What Is A Retirement Annuity

What Is A Retirement Annuity

An annuity is a contract between you and an insurance company. You pay a premium to the insurer. In return, your funds grow at a fixed or variable rate. Depending on the type of annuity, your funds and income are returned to you automatically or optionally in a guaranteed series of income payments.

What Is A Retirement Annuity?

Converting the annuity balance into income is called annuitization. If your contract does not require you to annuitize, you can invest your funds indefinitely. You may have the option to make a one-time withdrawal and/or designate a beneficiary to receive the money upon your death.

These types of pension are not mutually exclusive. For example, you can buy a single annuity that is both deferred and variable. If you decide to annuitize, you can structure the payment for the rest of your life or for a specific term, such as 20 years.

If you want long-term income without annual fees and complications, there are other options. Social security and dividend stocks can meet your needs.

Social Security: Other than annuities, Social Security is one of the few income streams you can have for the rest of your life.

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Your Social Security benefits are calculated from your earnings history. However, you can influence the amount – even if you’re close to retirement. For example, you can increase your income from work in the later years of your career so that your benefits are greater. Waiting to collect Social Security will also increase your benefits.

In relation to an annuity, Social Security has clear advantages with no upfront cost. If you delay retirement to increase your Social Security benefits, you will forgo future income. But at least that money doesn’t come out of your savings account.

Dividends: Dividend stocks can also generate lifetime income. Unfortunately, this is not guaranteed. A company always has the option to reduce, suspend or cancel its dividend.

What Is A Retirement Annuity

The good news is that some dividend stocks are more reliable than others. Dividend aristocrats, for example, are companies that have paid and increased their dividends for 25 or more consecutive years. There is also a group of 50-year-old dividend growers called the Dividend Kings.

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Dividend aristocrats and dividend kings do not guarantee dividends, but they will not be quick to cancel dividends. If you can handle some risk, these stocks are perfect options for retirement income.

Compared to annuities, dividend stocks have more uncertainty but higher income potential. You will earn dividend income and your shares should appreciate over time.

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An annuity guarantees income for a specified period of time or for the rest of your life. This guarantee can be comforting, especially if you are worried about the survival of your savings. A major downside is that annuities pay a price for the peace of mind they provide.

Your retirement plan can include multiple sources of income—an annuity, a strategically timed Social Security benefit, and, for example, dividend income. Diversifying in this way can mitigate the downsides of any income source, including the uncertainty of your annual fee and dividend portfolio.

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What Is A Retirement Annuity

Calculated from the average return of all stock recommendations since the start of the stock advisor service in February 2002. Return deadline 12/27/2022.

Manulife Retirement / Annuity Plans [2022]

Calculated from time-weighted returns since 2002. Volatility profile based on the three-year trailing standard deviation of service investment returns.

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance and more from The Motley Fool’s premium services The smartest and most tax-efficient way to save for your golden years is through annuities and other long-term, equity-oriented investments purpose. Aside from the occasional nest egg check, most people don’t think about their retirement savings before maturity. However, if you are considering leaving South Africa and moving abroad, it is advisable to look at the bigger picture. If you live in South Africa and are under the age of 55, you do not have access to your capital. This changes when you move abroad. Unfortunately, the same does not apply to living annuities.

If you have one, you should already know. A living annuity is an investment vehicle that puts you in the driver’s seat, choosing from a range of investments. The biggest drawcard for a living annuity is that you have the flexibility to be able to withdraw money according to your needs and in line with the living annuity withdrawal regime of 2.5% to 17.5% per annum. You are also free to change service provider to change your investment strategy. What happens to the living pension after death? If you’ve moved into a guaranteed pension, you’ll be able to leave a legacy to your loved ones – the remainder of your capital will be distributed to your beneficiaries after you pass.

While it is important to remember that it is your responsibility to ensure that you have sufficient income for the rest of your life, an annuity is only useful if you plan to retire in South Africa or if your beneficiaries live in South Africa.

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A retirement plan aims to help individuals build their retirement nest egg in a tax efficient manner. This savings tool comes with many benefits. Unlike a pension or insurance fund, where the final decision rests with the trustees on how the funds will be paid upon death, with an RA, your designated beneficiaries are paid directly.

One of the biggest limitations of retirement annuities is the rule that prevents you from accessing the capital before the official retirement age of 55. Clearly intended to help you stick to your retirement savings goals, this rule doesn’t make as much sense if you’ve already moved permanently from South Africa. In this case, financial migration is your ticket to withdraw your retirement pension, after which you can transfer your money abroad to work as you wish. This only applies if you do not withdraw from your pension after the age of 55.

With an annuity, you’re allowed to take one-third in cash and then you’re required to invest the remaining two-thirds, which is where the living annuity comes in. At this point you will choose between investing in a living annuity or a guaranteed annuity – a living annuity is an investment product, while a guaranteed annuity is an insurance product. If you are interested in weighing up the tax implications of an annuity versus a living annuity, visit the South African Revenue Service website for an overview of how an annuity is taxed.

What Is A Retirement Annuity

When you retire as a member of a pension fund, retirement savings fund or superannuation fund and wish to receive part of your capital as a lump sum, you are allowed to transfer a lump sum equal to a maximum by one third. Pension interest in that fund, unless the total value of your retirement portfolio with that insurer does not exceed R247 500 (depending on your unique circumstances), you may receive the full pension interest as a lump sum .

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Capital: You cannot access capital individually unless you reach a nominal limit of R50 000 (R75 000 in certain circumstances) and even financial immigration will not allow you to touch that capital.

Income: The income you receive from your pension is paid in South African currency and must be converted to foreign currency before you move overseas.

Full policy withdrawal: You can cash out as your living pension is below R50 000 (R75 000 in some cases). Even if you can reduce your equity through an accelerated reduction strategy, this move will be subject to tax.

In this case, your income level will be fixed and will increase annually according to the method you chose when registering for this product.

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Income: You should think carefully about the payment frequency you want. It depends on how you plan to access the income in South Africa

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