Question: I am a member of a pension fund that will pay out a monthly pension to me when I retire. When I die, my spouse will receive a pension that is half of what I get. I have done some calculations and I do not think that she will be able to survive on that amount of money. What options are open to me?

Answer: There are a number of potential solutions for you, and I will go through the pros and cons of each one. You can check whether your pension fund offers 100% spouse’s benefit. This will result in your initial pension being smaller but it will give you peace of mind.

If you cannot get the right solution from your current pension fund, then you can look at buying the pension from another provider. Your pension fund benefit statement should give you the transfer value at retirement. You can then get quotes from other providers. 

I would suggest you consider the following:

Living annuity

A living annuity works on the basis that you have a capital amount and make monthly withdrawals from it. These monthly withdrawals should ideally not exceed 5% of the capital value over the course of a year.

The advantage here is that should you die, your spouse will continue to receive the full pension.

The downside is that you do carry the risk of your investments not delivering a return of at least 5% plus costs. If that happens, you will start using up some of your capital.

Insider tip

You can currently get a long bond that will give you a return of around 8.5% a year. If you use this as the investment vehicle for your annuity, you will have no worries about the investment delivering less than 5% plus costs until the bond expires.

Life annuity

You can buy a life annuity from an insurance company and get a spouse’s pension of 75% or 100% of what you get.

Insured annuity

Some companies offer an insured annuity. This product gives you a monthly pension and, when you die, it will pay your spouse the full value of what you invested. She can use this to provide a pension for herself.

I find this type of solution is worth considering if your spouse is more than five years younger than you. It is also something to consider if it is likely that your spouse will need some form of assisted care, which is likely to be costly.

As you can see, there are several solutions open to you and you should get your financial adviser to provide you with a range of quotes to help you to make the right choice. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.