Retiring soon? Here is a useful tip to help ensure you keep astride of inflation.
Chris Bvsenberg, chief consultant at Sanlam group benefits, said very few people, with maturing retirement annuities or beneficiaries of most defined contribution funds, buy an annuity giving them a monthly pension which is linked to inflation.
This means that as they get older the purchasing power of their income drops in line with the inflation.
People have a choice between a constant pension each month without annual increases or a lower initial pension which increases every month.
The larger the potential increases the lower the initial pension.
Bvsenberg said unfortunately most pensioners perceive the high initial pension as better.
He said it was all very similar to a night on the town and the fortunes of a brewery.
"If a hangover came the night before and the elation the morning after, brewers would soon be out of business.
"Retirees seem to follow this principle of going for instant gratification."
Bvsenberg said that if a retiree was in good health, the best option was to elect a pension to increase in line with inflation as this would be more tax efficient; provide financial protection against "living too long"; and makes financial planning easier as even pensioners had to save in earlier years of retirement to provide for later years.
He said that a package structured to show a three percent real rate of return (the nominal rate of return less the inflation rate) would provide sufficient leeway for an investment to keep up with inflation.
He said most defined benefit pension funds already worked on this principle.
HOW AN INFLATION-LINKED ANNUITY WORKS
MaleFemale
Age60656065
Level monthly pensionR1410R1540R1330R1410
Starting point for pension with future growthR770R900R680R770
Assumption: A man and a woman aged 60 and 65 with an investment of R100 000.