Understanding your investments and retirement choices: Why informed decision-making is essential

Feel free to reach out to PSG Wealth Adviser  Bernice Barnard  directly.

The complexity of retirement and investment products, combined with a general lack of financial literacy, can easily lead to poor outcomes if you’re not actively engaged in the process.

Why it’s not enough to simply “trust the process”

Investments and retirement products are structured with specific rules and outcomes. What works well for one person may not necessarily work well for another. Unfortunately, many investors only realise this once it’s too late – when they are already locked into a product that doesn’t align with their goals, lifestyle or family needs.

With a basic understanding of your options and the right questions at hand, you can take greater control of your financial future and avoid unnecessary setbacks.

Important concepts every investor should understand

Before you make any retirement or investment decision, especially one that may be permanent, ensure that you are fully aware of the following:

1.     You don’t have to retire just because you can

From the age of 55, retirement annuities and preservation funds offer the option to retire. However, this is not a requirement. If you are still working and able to contribute, it may be in your best interest to defer retiring from the fund and allow your capital to grow further. If there’s no compelling reason to retire immediately, consider waiting.

2.     Understand the full range of retirement income options

When you retire, you generally have two primary types of annuities:

·       A Living Annuity which allows you to draw a flexible income of between 2.5% and 17.5% annually, remain invested and nominate beneficiaries, but it also carries market and longevity risk.

·       A Guaranteed Annuity which provides a secure monthly income for life, often with fewer moving parts but with less flexibility.

Neither of these options offers you access to capital in the form of additional lump sum withdrawals, and each has its benefits and limitations. Your health, lifestyle, dependants and inflation expectations should all play a role in determining its suitability.

It’s important to note that some employers may have contractual retirement rules. In some instances, you will no longer be able to contribute to your employer pension or provident fund when you reach a certain age. However, if you are still earning an income and want to continue saving, there are usually other options, such as transferring your benefit to a retirement annuity or preservation fund, depending on the fund rules. There are also solutions available that allow you to continue contributing independently.

Note: In the case of certain public sector funds like the GEPF, retirement benefits cannot be transferred to another fund (such as a preservation fund or retirement annuity). Accessing the capital typically requires resignation, which comes with important tax and benefit considerations. Be sure to understand the implications before making any decisions.

3.     Escalation matters

Ensure you understand whether your retirement income will escalate. If your income remains fixed, the real value of that income will erode over time, potentially leaving you unable to meet basic living expenses later in retirement.

4.     Tax still applies in retirement

While retirement savings may have enjoyed tax deductions during your working life, retirement income is still subject to personal income tax. Ensure your income planning accounts for this and that you are not overestimating the amount that will end up in your pocket.

5.     Your decisions may be irreversible

Certain retirement choices, such as purchasing a guaranteed annuity, cannot be reversed. Once you’ve committed to the product, both its structure and the terms of your income are typically locked in. That’s why it’s essential to take the time upfront to understand how it works and what it could mean for you in the years ahead.

6.     Your spouse and dependants’ needs must be considered

If you have financial dependants, ensure that your chosen solution continues to provide for them in the event of your passing. Not all annuity products automatically include spousal cover or beneficiary options. Ask your adviser to explain precisely what happens to your income and capital upon death.

7.     You can combine products

A blended approach that combines both living and guaranteed annuities may offer the best of both worlds: income security and investment flexibility. Ask your adviser whether this is a suitable option based on your needs.

The cost of not understanding your choices

When investors make uninformed decisions, even with professional advice, the consequences can be severe, such as:

• Fixed income that does not increase with inflation
• The irretrievable loss of access to capital
• Lack of provision for a spouse or dependants
• Inability to continue saving, resulting in underfunded retirement
• Tax inefficiencies eroding the value of retirement income
• Extended working years due to inadequate income later in life

These kinds of outcomes can often be avoided, highlighting just how important it is to ask the right questions before making any long-term financial commitment.

How to take control of the conversation with your adviser

To ensure that you are an active participant in your financial planning, consider the following steps:

• Ask for explanations in plain language. If you don’t understand the product or the recommendation, keep asking until you do.
• Request income projections. What will your income look like after 5, 10 or 20 years? While these projections cannot guarantee future outcomes, they will still provide you with a good indication of your future income and allow you to plan ahead while you still have time to do so.
• Understand all your options. Don’t be afraid to ask what alternatives were considered and why the recommendation is preferred.
• Clarify what can and cannot be changed later. Some products are irreversible. Know what you are committing to.
• Review your plan annually. Needs, legislation and market conditions change. Ensure that it continues to support your goals and reflects any changes in your circumstances and priorities.
• Consult a specialist if needed. In some cases, particularly with complex decisions, it may be helpful to obtain a second opinion or consult a specialist, such as a tax professional, to ensure that all aspects are properly considered within the greater scope of things.

Choosing how to invest or retire isn't just a financial decision, it's an extremely personal one. While a skilled adviser plays a crucial role in this process, the best financial plans are created through a collaborative approach. When you take the time to ask questions, understand your options, and weigh them carefully, you're more likely to end up with a plan that genuinely reflects your needs and goals.