THE most critical decision individuals who are about to retire have to make is how to invest the proceeds of pension funds and-or retirement annuities (RA)

In buying an RA, all contributions within the allowable deduction made before the end of February are tax deductible for the tax year. For this reason, more RA's are sold in February than in any other month of the year.

Consequently, many of these policies fall due in February. Retirees are informed of the maturity and are given a choice of options, which is often confusing

One-third of the investment may be taken in cash. Recent legislation dictates that R300,000 of one-third is tax free. The balance will be taxed in stages of increments of R300000. The remainder has to be used to buy an annuity.

The two choices that confront investors at retirement are:

• From whom to buy the annuity

Irrespective of where the original investment was made, everyone is entitled to buy an annuity from any assurance company or institution. As annuity rates differ from company to company, it is advisable to study the market for the best rate.

• The type of annuity

Fixed Annuity - where the retiree forfeits the capital in favour of buying a guaranteed pension from an insurance company. There are different types of guarantees available. Either spouse can be added to the retiree's annuity so that the pension pays out until the death of the second spouse.

You can have escalations and preserve the capital through buying a life policy on death, whereby the annuity will cease and a capital lump sum will be paid. The rates available for this type of annuity depend on age and current interest rates.

The Living Annuity

The available funds are placed in a portfolio of the investor's choice. Investors, subject to certain restrictions, may elect to structure the fund as conservatively or aggressively as they wish. The income derived is based on a percentage of the fund value each year of a minimum withdrawal of 2,5 percent and a maximum of 17,5 percent.

On an investor's death, dependants may continue with the annuity or may choose to have the remaining value paid to them over five years.

Further considerations

• In the case of a fixed annuity, the rate is fixed at inception. Annuity rates do fluctuate, so if rates are high at inception, this would be advantageous. However, when interest rates are low at inception, an investor is locked into a low rate for life.
• The purchasing power of a fixed annuity will diminish over time because of inflation.
• Investors have more control in the case of a living annuity in that they are able to select the level of income annually (between 2,5percent and 17,5 percent of the fund value).
• A living annuity may be converted to a fixed annuity at the election of the annuitant, but not from a fixed to a living annuity.

I urge people who are about to retire to obtain professional advice in regard to the choice of the annuity. There are advantages and disadvantages with both living and fixed annuities and the annuity chosen must be appropriate for ones financial needs.

- The writer is financial adviser of Bryan Hirsch Colley and Associates. E-mail bryanh@bhca or telephone 011-880-4888.