Posted on February 03, 2023

Question: I am planning for retirement. Should I buy an annuity with my pension fund to get a fixed income for life or take my pension and start a business in old age? What are the pros and cons of investing in annuities? Kindly address the retiree’s need for a regular income, investment risk profile, health, and views on longevity. The real dilemma is that the older we get, the less risk we should be taking with our pension fund.


Planning for retirement is a phase that we all need to pass through at a point in our lives. When at this point, we need to be patient with ourselves and make lifelong decisions that will suit us in our retirement life considering all factors in our life stages.

In retirement, the greatest need of a retiree is liquidity to meet their immediate needs on a day-to-day basis. This brings the member to look into retirement options that will ensure one has sufficient funds to take care of their expenses as and when required. The retirement options are either accessing the fund as a lumpsum or getting a solution that will enable the member to have a monthly income either through an annuity or income draw down option.

On accessing the lumpsum, most retirees think of securing a source of income (often considering rental income) or starting a business. The decision to start a business in old age with retirement funds has been discouraged due to the high fail rate that has been experienced. Based on an industry research done in 2018, it was established that over 60% of businesses started in retirement failed and the main reason attributed to this failure was lack of expertise in the business amongst many other risks associated with running a business especially in retirement. These risks are prone to expose the retiree more into old age poverty if the capital originated from the pension funds and if the business fails. Nevertheless, a good business can give one a steady source of income in retirement. To mitigate the risks, one can start the business during their working life as a ‘side hustle’ so that they can gain the knowledge and experience required for that that particular business. If one strongly believes that they have a solid business idea which they would want to implement in retirement, then it is advisable to consult those who have carried out a similar business and also go as far as engaging a business coach so that they can guide you in setting up the business and its system.

Prudent financial advice guides that a member needs to have a source of defined retirement income. The options available in the market is either the annuity or income draw down. An annuity is an arrangement where a member will transfer their fund value to an insurance and purchase a monthly pay out for the rest of their lives. The pay-out is what is referred to as an annuity.  An income draw down on the other hand is where a retiree transfers the fund to an investment fund where they continue to earn a return from the fund as they draw down amounts to continue sustaining their livelihoods. The choice between these two will be the preference and investment profile of the member. The fund size is also a determining factor whereby large amounts preferably from 5 million can be considered in an income draw down arrangement. While an income draw down offers a lot of flexibility to the advantage of the member in terms of payment frequency and amount payable it also transfers the investment risk to the member which is an important factor to consider at selection point. In good years where the market performance is good, members may end up utilizing the return as draw downs for their retirement income. On the other hand, bad years may result to low income return. The investment strategy for most income draw downs are conservative offers a minimum guarantee return that ensures the principle is always protected. This will ensure that the retiree has minimised risk exposure in their investment option at retirement.

An annuity is also a permissible retirement options often ideal for individuals with a low-risk appetite and often, though not necessarily, with funds below 5 million. This option guarantees a pay-out of a predetermined amount despite market performance. This option may not give as much flexibility on amount and time for payment however it guarantees a payment for life to the member.

Based on the above, it is advisable to ensure the risk exposure to especially old age poverty is reduced and liquidity is guaranteed to the member in retirement. It is therefore advisable to consider an annuity or income draw down arrangement that will guarantee the above in comparison to starting a business in old age with retirement benefits.

Retiring members should consult widely before they make this decision. It is one of the biggest decisions they would make in the phase of their life.

By Chrisensia Ododa, Retirement Coach and Senior Advisor, Umbrella and Retails Solutions at Zamara