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WHEN a policy matures the insurance company sends a letter to the policyholder advising them of options at expiry date. The investor is given a choice of a wide range of investment options. One of them is to leave the policy with the insurance company, with or without future premiums.
On maturation of a retirement annuity policy, the same type of letter is sent.
There is a big difference, however, between the two situations. With an annuity the holder needs to make a decision about the purchase of their pension.
While the company will offer certain options on maturity of the retirement annuity, only one-third of the proceeds may be taken in cash, subject to certain tax conditions. The remaining two-thirds must be used to buy an annuity, another word for pension. The only time you can take the full amount is if the total fund is below R75000.
While other investments offer you the flexibility to change a decision during the course of the investment period, once a fixed pension has been purchased, such pension is payable for the rest of the holder's life, or for the minimum guarantee period selected. So, once this type of pension has been purchased, you are bound by the terms and conditions and cannot change that decision in the future.
Factors that will affect the pension to be received are age at retirement and, more importantly, prevailing interest rates at that time. When interest rates are lower, then one's annuity is fixed at a lower level. Insurers sometimes offer higher rates because they are looking for those types of funds at a particular time and that is why it is so important to shop around before just accepting what you are offered by the company that you have your annuity with.
What most people are unaware of is that at retirement, one has the right to shop around all assurance houses to find the highest annuity available, and then to purchase that annuity, even if it means moving from the company where the original retirement annuity was purchased.
My advice to anyone receiving a letter advising them of the maturity of a retirement annuity is to shop around for the best possible retirement annuity rates before making any decision, irrespective of whether pressure is being applied by their insurance company or financial planner to make a quick decision, even if this results in a delay in taking the funds for an extra month or so.
One is able to elect a different type of retirement annuity, namely, the living annuity, which I will explain to you in detail next week, together with further options and explanations.
l The writer is a director of Pioneer Financial Planning. Visit email@example.com