Working out the right investment for your retirement income

The big question is whether to take a variable income or a guaranteed income for life.

- By Warren Ingram

One of the biggest decisions you must make when you retire is how you will be paid from your investments. For most of us, the bulk of that income will come from retirement funds.

When you retire, you face a choice: take a variable income from your investments or a guaranteed income for life. The decision might seem easy. Who wants a variable income when you can get a guarantee? Unfortunately, the decision is not that simple.

When you retire, you have the option to take your retirement capital and buy a guaranteed pension, often called a life annuity.

A life annuity offers the surety that you will have a fixed income for the duration of your life. Some options provide an annual increase based on inflation, or a fixed escalation per year. This means you can opt to increase your pension by a fixed amount every year. If you are married, your spouse might get a portion of the income on your death, but no money will be paid to your children when you are both dead.

With a life annuity you know exactly how much money you will receive each month for the rest of your life. The life assurance company bears the risk of poor investment performance and the risk that you live longer than expected. However, you could suffer a total loss if the company goes bankrupt.