Head vs. Heart
/I recently sat down with a client who was just starting his retirement. He was taking his tax-free lump sum from his pension and the choice he had to make next was to either purchase an Annuity or to re-invest in an ARF (Approved Retirement Fund) with the balance of his pension funds.
An Annuity is purchased using your pension funds and is a simple retirement payment option that guarantees to pay you a particular amount every month throughout your life in retirement.
An ARF (Approved Retirement Fund) allows you to remain invested in the market with the ability to control your investment and take a flexible income in retirement.
It was clear after reviewing all his finances, that he did not need to rely on his pension to retain his current lifestyle in retirement (he had other savings separate to the pension). After considering all factors, from a financial perspective it made perfect sense for him to re-invest his funds in an ARF and retain ownership of his pension options, to try grow the pension. He could afford for his pension to effectively go to zero and he would not be significantly impacted. Purely from a financial perspective, the ARF was a more suitable option.
However, my client showed me a folder of all the records he had kept and continued to keep of his pension values. He described how he and his wife felt when their pensions reduced in value. So, I asked him would they continue to feel this anxiety even if there were small fluctuations in their pension values? To which he replied “Yes.”
In the end I advised my client to go with his gut, which was to buy the Annuity. Three months after the transaction, I was speaking with him again and he said he was enjoying his retirement and was really happy he didn’t have to think about the pension anymore. People think they have to re-invest their funds, they have to grow their money but that is not always the case. The right financial decision is not always the right life-balance decision. In this case the choice my client made was the correct one to allow him to enjoy his retired life.
