Annuity or lump sum?

Some sections of Malawians took to social media to discuss the proposed amendment to the Pensions Act.

I have followed that discussion with keen interest and noted that some views expressed on social media were predicated on overly optimistic assumptions.

I have strived to approach issues in this article after deliberating all the factors, both the positives and negatives, involved in pension management. Pension management should not be taken lightly. 

People suffer and economies collapse if the relevant authorities do not account for the long-term implications of pensions management.

Without further ado, I agree that the current waiting period of 6 months is too long. Pensioners and employees in other markets have shorter waiting periods, ranging between 12 and 15 weeks. Insurance is not as liquid as the banking system.

Pension funds are usually invested with investment companies to ensure a return on investment, which is usually awarded to the employee as a bonus.

The waiting period is critical to both parties—the insurer needs time to process the claims and have ample time to dis-invest funds to meet the claim. On the part of the claimant, it is time to reflect on how the funds will be managed.

The truth is pension payments may be the last source of income or saving; hence, should be handled carefully. I cannot stress this enough.

The other proposal to increase the lump sum pay-out from 40 percent to 60 percent looks appealing at face value. Without sounding complicated, this is purely an appetite for a bigger lump sum compared to the annuity.

With annuity, you receive the money for some time, usually for life sometimes. The 60 percent balance left after the claimant receives the initial 40 percent is usually spread out over 10 years.

After 10 years, the annuity continues to pay for life. Some annuity can be extended to children. This guarantees that if the claimant dies, his/her children will continue receiving payments from the fund until they are 18 years old.

The key challenge with a huge lump sum is that the money could quickly run out and force the pensioner to live longer with no source of income.

The truth is not everyone can handle money, and it usually sounds easy when the actual money is not there; plans for using money always sound great, and we know how such stories end.

The advantage of a huge lump sum, though, is that one could settle debts quickly, invest in profitable businesses, and sponsor projects.

An annuity will support you for the rest of your life. I support a well-structured annuity because it can be passed on to the spouse or nominated beneficially in case of an untimely death whilst one is retired. You can imagine an early death after just receiving your lump sum. I know most of us would quickly pass on the idea of dying with millions in the bank account.

Of late, I have noted annuity programmes linked to medical, meaning one will have medical attention without worrying about who will settle the bills. I always advise my clients to factor in all the punches life throws at human beings when making such decisions. A big sum of money always sounds good, and immediately all problems seem to be solved. After all, money talks.

I suggest the better way is to challenge for better annuity products, rather than getting annuity pay-outs that will not support the pensioner after the lump sum is paid out. As we age, we have less energy and wisdom to run up and down.

That is when we need to be guaranteed money for support. Times have changed. Children help, but the fact is they are also probably struggling to make a living.

Utmost, we could have an option to satisfy those who go for a big lump sum and a well-planned annuity. I am certain 10 years from now, we will have a look at two sets and appreciate the best options for future retirees.