Key retirement decisions that can impact your financial future

The transition into retirement often comes with a wave of uncertainty, heightened by the number of interconnected financial decisions that must be made at this stage. Many of these choices will have long-term implications for your financial security, your liquidity, and your ability to leave a legacy. Here we explore three of the most important decisions you’ll face and the key factors to weigh before acting.

1. Retiring from a retirement annuity: Choosing when to retire from a retirement annuity (RA) is a decision that needs to be carefully timed. Unlike pension and provident funds, where the retirement age is set by the fund’s rules, an RA can be retired at any time from age 55, with no upper age limit. This flexibility makes timing a crucial part of both retirement and estate planning.

While your funds remain in an RA, they must be invested in line with Regulation 28 of the Pension Funds Act, which limits offshore and equity exposure. However, once you retire from the RA, one of the options is to commute your capital into a living annuity, where investment choices are no longer bound by Regulation 28, allowing for greater offshore exposure and potentially higher-risk strategies.

However, there are trade-offs. While funds remain in your RA, you can continue contributing within the annual tax-deductible limits, benefiting from compounded, tax-free growth. On the other hand, once transferred to a living annuity, you must start drawing down at a rate of between 2.5% and 17.5% annually, with the income taxed at your marginal rate. As such, deciding when to retire from your RA requires careful analysis of how the move fits into your broader plan, your tax position, and your estate objectives.

2. Taking a cash commutation: Liquidity is often underestimated in retirement planning. Without accessible discretionary capital, you may find yourself unable to fund larger capital expenses or respond to emergencies without compromising your income stream. This makes the decision to take a cash commutation at retirement an important one.

Under current legislation, members of pension, provident, and retirement annuity funds (except for certain vested provident benefits pre-1 March 2021) may commute up to one-third of their retirement capital as cash, subject to tax. Currently, the first R550 000 of cumulative withdrawals is tax-free, but this is reduced if previous taxable withdrawals have been made. Ideally, request a tax simulation before making any withdrawals to understand the true after-tax value.

If you don’t already have an emergency fund, taking a cash lump sum could be vital to your long-term financial security, especially if this discretionary capital is held in an accessible, low-risk investment earmarked for unplanned expenses. Before deciding to draw cash, request a detailed cash flow projection from your advisor to ensure that the withdrawal will not compromise your retirement income over time.

3. Choosing the right annuity income structure: Two major risks face retirees: the possibility of outliving their capital, and the erosion of their income’s purchasing power by inflation. Your choice of annuity structure will determine how effectively you can mitigate these risks.

• A life annuity is an insurance product that guarantees a set income for life, regardless of how long you live. The insurer assumes both investment and longevity risk. Upon your death, the policy ends, and there is no residual value for heirs. The certainty of income can be reassuring, particularly for covering essential living expenses.
• A living annuity is an investment product owned in your name. You take on the investment and inflation risk, but you retain control over your portfolio and the ability to bequeath any remaining capital to your beneficiaries. You may adjust your drawdown (within the 2.5%–17.5% range) and your investment strategy over time. 
• A hybrid structure combines the two: allocating a portion of capital to a life annuity to secure a guaranteed income floor, with the remainder invested in a living annuity for flexibility, growth potential, and legacy planning. This approach can provide both stability and control.
• Given the complexity and long-term implications, this decision should be made with guidance from a retirement planning specialist who can assess your income needs, tax position, investment preferences, and estate objectives.

Retirement is not the end of financial planning, it’s the beginning of a new, equally important chapter. The timing of your RA retirement, the decision to take a cash lump sum, and the choice of annuity structure will shape your financial well-being for decades. Each decision is interconnected, with implications for your tax position, liquidity, risk exposure, and estate. As such, thoughtful, well-timed choices, supported by robust financial modelling, will go a long way in securing a stable and flexible retirement future.

* Tapfuma is a certified financial planner professional at Crue Invest.

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