While individual goals differ when it comes to investing for retirement, the core objectives remain the same: to accumulate sufficient assets during one’s working life to achieve financial independence, maintain a desired standard of living, and potentially leave a legacy. In his capacity as a trustee of the Allan Gray retirement funds, Richard Carter focuses on the critical decisions retirement fund members need to make at retirement.
Investing for retirement is often described in technical terms: contribution rates, asset allocation and tax efficiency. However, at its core, it is both simpler and more demanding: It requires discipline over time.
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 clear alignment between objectives and investment approach, along with an understanding that the journey is unlikely to be smooth. Markets will fluctuate, often unpredictably, but a well-constructed plan anticipates this volatility and is designed to withstand it.
The habits, structures and decisions formed during the accumulation phase ultimately shape both the choices available at retirement and the sustainability of income thereafter.
Key principles during the accumulation phase
The accumulation phase is where the foundations of retirement outcomes are laid. Decisions made early – and consistently repeated over decades – carry the biggest weight.
The fundamentals of investing for retirement are well established:
- Start investing as early as possible.
- Invest at an appropriate level.
- Invest in line with long-term objectives.
- Avoid withdrawals, unless not withdrawing would lead to a worse financial outcome.
- Avoid unnecessary changes to a well-constructed plan.
Small advantages – such as starting sooner, increasing contributions when possible, and remaining invested through uncertainty – compound meaningfully over time. Conversely, interruptions, delays, withdrawals along the way and reactive decision-making all 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 you to access your 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.
The above principles provide a framework for navigating uncertainty while keeping the long-term objective firmly in focus: the ability to convert your investment into a reliable, sustainable income in retirement.
Factors to consider at retirement
Retirement should not be viewed as a final destination, but rather a significant milestone in a longer financial journey. The primary purpose of your retirement investment is to provide a sustainable income – often over many years, when your ability to earn other income has reduced or ceased. This should remain central to all decisions made at retirement.
Success depends less on finding the perfect strategy and more on sticking to a sound one.
While investing for retirement often happens on “autopilot”, the same cannot be said for the decisions you need to make when you retire. At this stage, decisions become more complex and require careful consideration.
Key factors include:
- Your assets and liabilities
- Your income needs and desired lifestyle
- Your tolerance for investment risk
- Withdrawal rates and the sustainability of your income
- The trade-off between flexibility and certainty
- The tax implications of different choices
- Your health and life expectancy, bearing in mind that you could live longer than you think
These considerations all inform your planning and eventual product choices. For many members, working through them can feel overwhelming. In this context, consulting an independent financial adviser (IFA) can be invaluable. Even if you did not seek advice during your accumulation phase, now might be the time to appoint an IFA to help guide decision-making and provide support during this critical transition.
Should you take 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 your long-term income needs. It is important to remember:
- The lump sum is a maximum allowable amount, not a target.
- Taking cash reduces the capital available to generate future income.
Members may choose to take a cash lump sum for various reasons, such as settling debt, establishing an emergency fund, or investing in products that allow for supplementary income. One of the things to bear in mind is the tax implications.
High-level tax considerations
Tax plays an important role in retirement decisions:
- Income from annuities is taxed as income.
- Cash taken at retirement is taxed according to a separate, more favourable tax table, which includes a tax-free portion (subject to thresholds).
- Previous withdrawals are considered when determining the tax on the retirement lump sum, although withdrawals under the two-pot system are excluded from this calculation.
Retirement presents an opportunity to influence your overall tax outcome. In some cases, taking a portion as cash and investing it outside the retirement fund may reduce your effective tax rate. However, these assets will then be taxed as discretionary investments, meaning they are taxed on interest, dividends and capital gains – not on income drawn.
The interaction between tax, cash withdrawals and income sustainability can be complex and the trade-offs need to be considered.
Converting your investment to income
The portion of your 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
You can self-insure by investing in a living annuity. Your money can continue to grow, depending on the performance of your underlying investment(s).
With a living annuity:
- You choose your level of income (within limits)
- You select the underlying investments (typically unit trusts)
- Your capital remains invested and grows, or is eroded by investment performance and the income you draw
A living annuity may be suitable if you:
- Value flexibility and control
- Are willing to take responsibility for ensuring your income is sustainable
- Want to, and can afford to, leave any remaining capital to beneficiaries
While this option offers flexibility, it also means you carry the risk of outliving your savings. The most important consideration is whether your capital is sufficient to provide an income for you and any dependants over a potentially long retirement.
Guaranteed life annuity
Alternatively, you can insure your income by purchasing a guaranteed life annuity from an insurer.
A guaranteed annuity:
- Pays an income for life, regardless of how long you live
- Can be structured to continue for a spouse
- Offers various options in terms of income increases and protection features
A guaranteed annuity may be suitable if you:
- Want certainty that your 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
- Are comfortable with limited flexibility
The primary benefit is that longevity risk – the risk of outliving your savings – is transferred to the insurer. However, this comes with trade-offs:
- Limited flexibility in investment strategy
- Restrictions on adjusting income levels
- Reduced estate-planning benefits
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, the trustees of the Allan Gray retirement funds offer two annuity options:
- The Allan Gray Living Annuity, invested in the Allan Gray Balanced Fund, with drawdown rates managed within sensible limits.
- A guaranteed life annuity offered by a third party, Just Retirement Life, partly invested in the Allan Gray Balanced Fund. This provides a guaranteed income for life, with increases linked to the investment performance of the Allan Gray Balanced Fund.
These options are not mandatory, but are available for members to consider carefully alongside other alternatives.
Guidance and advice
Retirement decisions are complex and far-reaching. Making use of educational resources – such as Allan Gray’s “Preparing for retirement” guide – can help build understanding. Equally, this may be an appropriate time to seek guidance from a qualified IFA to help align decisions with your personal circumstances and long-term objectives.
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