LIFE ASSURANCE: Retirement Annuities

What are retirement annuities (RA’s)?

RA‘s are safe forms of long-term savings plans where you pay a monthly premium into the retirement annuity plan and in return, upon retirement receive a monthly payment for the rest of your life. An annuity is a long term insurance product that pays out income and can be used as part of a retirement plan. Annuities are a popular choice of saving for those who want to receive a steady income stream in retirement. You make an investment in the annuity and the insurer then makes payments to you at a future date(s) upon retirement.

How many types of retirement annuities are there?

Although there are many variations of retirement annuity policies to choose from, there are mainly two types, deferred and immediate. With a deferred annuity, your money is invested for a period of time until you are ready to begin making withdrawals, typically when you reach retirement at the age of 60 years. If you opt for an immediate annuity, you begin to receive payments soon after you make your initial savings. For example, you might consider purchasing an immediate annuity as you approach retirement age with your lump sum payout from your pension benefit payout.

The deferred annuity accumulates money while the immediate annuity pays out. Within these two types, annuities can also be either fixed (con-ventional) or variable (living annuities) depending on whether the payout is a fixed sum (guaranteed). The insurers take the responsibility for fluc-tuations in the market and the risk that you may live longer than average but the investment dies with you.

The living annuity is tied to the performance of the overall market, group of investments, or a combination of the two, and the policyholder carries both investment and mortality (death) risk.

Are Retirement Annuities a safe way of saving?

It is comforting to know that RA’s are lawfully protected from creditors meaning that not even in the event of insolvency or bankruptcy, will anybody ordinarily have access to the funds before the selected maturity date. Therefore, these savings can always be left to grow until you are ready to start withdrawing (benefiting) from them, when you reach the age 60 years, depending on the savings plan. NAMFISA supervises the insurers through regular monitoring of their solvency levels and assesses whether these insurers will be able to hon-our their obligations when your savings mature.

Is there any tax incentives involved in Retirement Annuity savings?

The premiums you pay towards retirement saving are tax deductible i.e. you can apply for a tax refund on your premium contribution as an incentive for you to save towards your retirement. On the other hand, if you contributed towards a retirement fund while working, the Income Tax Act of Namibia allows you at retirement, only one third (1/3) of the pension savings benefit to be taken out as cash (tax free), while the other two thirds (2/3) must be invested to give you a regular income.

You may also invest your one third (1/3) lump-sum payout should you wish to do so. If you belong to a provident fund you may receive either monthly pension payments or a lump-sum payment which you should use to buy an annuity (monthly pension).

Why do I need to save when I already belong to an employer sponsored retire-ment savings plan?

It is a fact that studies conducted over the years have shown that most people do not have enough money to maintain their standard of living when they retire. Even if you have a retirement fund which guarantees an income for the rest of your life, it is unlikely that you will have enough money to live comfortably when you retire.

Make sure your retirement savings are not eaten away by inflation (rise in the general price of goods) and that these savings last as long as you do

Therefore to make sure your retirement savings are not eaten away by inflation (rise in the general price of goods) and that these savings last as long as you do, some retirements allow for top up contributions. If yours does not, it would be wise to make additional savings in a form of retirement annuities as soon as you can.

Can I belong to more than one retirement annuity plan?

Yes, you are allowed to contribute premiums to as many retirement annuity plans or indeed any other pension plans as you want. The only thing you need to be aware of is that there is a limit in terms of how much tax you are allowed to claim back i.e. up N$40 000 per annum is allowed. This is also a personal choice based on what you can afford.

What are the benefits of RA’s?

1. With the conventional annuity, your regular monthly income is guaranteed for life. The insurer takes responsibility for fluctuations in the market and the risk that you may live longer than the average. However, the disad-vantage is that you get the same income every month or year regardless of inflation and your investment dies with you. Generally you cannot use these funds before the age of 55 years, so ensure that you know how you should invest and when the money will become available for your use.

2. Another advantage is that there is tax incentive involved of which a portion of your premium is tax deductible.

3. A creditor may not lay claims against your retirement savings so these funds are relatively safe and protected by law.

What are some of the reasons that can contribute to you finding yourself in a situation where you do not have enough money to cover your living expenses after retirement?

1. Not having a proper financial plan that you regularly review and adjust goals.

2. Nowadays, there is a possibility of living longer after retirement than ini-tially forecasted, which means we will need more money when we retire.

3. There is usually a shortfall between the benefits of an employer spon-sored pension savings scheme and what you need to retire on.

4. Healthcare costs continue to grow and medical inflation is higher than ordinary inflation, hence high medical costs can be expected after retire-ment. It is a fact that the older you get the more prone to sickness you become; hence high medical bills will be expected.

5. Taking early retirement or retrenchment packages e.g. five years before normal retirement means you have added five years to your life after retirement and subtracted five years from your retirement savings. There-fore, you could have saved and earned more returns on your savings had you worked until the normal retirement age.

6. Sometimes there is just too little, too late, especially when many of us leave saving for retirement too late in our years. This may result in too little capital being accumulated for a comfortable retirement.

7. Not saving towards your retirement as well as spending your retirement payout when you change jobs is the worst mistake you can make. Rather reinvest your payout so that it will remain part of your retirement plan.

4. You can invest up to the age of 65 years but can only withdraw or access your retirement investments from the age of 55 years.

5. There are other added benefits to the retirement savings such as the adding of life cover and disability to your annuity.

6. You should ask about the related fees that can cut into any profits the an-nuity pays out, such as commissions, annual fees and any other charges. Most annuities are sold by insurance brokers or other sales people who collect a commission.

It is a fact that studies conducted over the years have shown that most people do not have enough money to maintain their standard of living when they retire

What must I do when I want to buy a Retirement Annuity policy?

1. Make sure that the insurer as well as the intermediary (insurance agent or broker) from whom you buy an RA, is registered with NAMFISA and licensed under the Long-term Insurance Act.

2. Ask for or obtain proper advice and also request for a personal needs analysis to make sure you need an RA policy before you buy one.

3. Although we always encourage you to save, ensure that you can afford to save.

4. Always read your policy contract to ensure that you understand the terms and conditions before you sign.

5. Beware of savings scams.

6. Gather all the information you can get about annuity policies because the more you know the better position you are in to get great annuity rates.

7. Compare annuity quotation sheets to find out which insurance provid-ers and finance companies are looking out for your best interest as well as their own. This step will give you the highest annuity rates possible, with the lowest prices too.