free investment advice logo

Here's the deal: You may read the information on the site for free and ask questions. As and when I have the time I'll answer the questions on the website and add new articles. Please do not consider it to be advice - the only free investment advice is to apply your own mind. If you are worried about your investments, I am willing to have a look and improve it. If you are destitute I will try to help free of charge (but you join at the back of the queue). If you are not destitute then email me and we can agree a lower fee (percentage terms, repeating monthly, is fine) than you are currently charged. I have limited time available, and will prioritise the work accordingly, so please be patient. Email me at invest@freeinvestmentadvice.org detailing the situation for which you'd like advice. Rob Baker

Living Annuities in South Africa - Key Info

leave a comment

During their working lives many people save up, so that on retirement they can purchase an annuity, which is a stream of regular payments. The stream of payments is usually monthly; but could be quarterly, biannually or annually - legislation requires that at least one payment a year occurs. With conventional annuities that stream of payments would be guaranteed until death, and there would be a predetermined contractual agreement on how annuity increases would be calculated.

Living annuities, on the other hand, do not guarantee ongoing payments until the annuitant's death, and you could run out of money before you die. Living annuities each have an investment balance which reduces as annuity payments are made from the account, increases with positive investment returns, decreases with negative investment returns, and also decreases when fees are paid. With living annuities, all risks lie with the annuitant.

Withdrawal rates

Living annuitants are restricted as to what percentage of their investment account balance they may withdraw - they may not withdraw less than 2.5% p.a. or more than 17.5% p.a. Withdrawing too low amounts isn't an issue, but annuitants withdrawing too much has led to annuitants running out of retirement funding; and has contributed to giving living annuities a bad name.

The ability to only withdrawal 2.5% p.a. is attractive to those who want minimal income at first; whilst the ability to draw up to 17.5% is attractive to those who want to withdraw as much as possible upfront.

NB: If your withdrawal rate is greater than the rate of return being earned by your investment account, then your investment balance will start reducing. In fact, even worse, if your withdrawal rate is greater than the real rate of return on your investment balance, then the purchasing power of your investment balance reduces - a rule of thumb is to avoid withdrawing any amount greater than the rate of return on the portfolio less the rate of inflation.

Tax

Bear in mind that taxation rules can be changed at any time; the situation at the time of writing is described here).

Annuitants pay tax on their withdrawals at their marginal rate of taxation.

The investment return on the investment balance is not subject to tax, e.g.:

Ongoing Responsibilities

Whilst with conventional annuities the annuitant has no decisions he/she must make after purchasing the annuity, with living annuities the annuitant remains responsible for:

As annuitants age, they sometimes lose their ability to make the above decisions competently, another disadvantage of living annuities.

The fact that there is still decision making to be done is looked upon in a positive light by some, who like to feel in control of their investment.

Investment Returns

As mentioned earlier, a living annuitant's investment balance increases with good investment returns (& vice versa), making it crucial to get the asset allocation pitched correctly for a client's risk profile and other circumstances, as well as the manager selection. Generally speaking, if there is doubt about which is the correct manager to choose, there are now several options in the market for low cost index funds is a fair option to go for.

Death benefits

With a living annuity the death benefit is simply the balance of the investment account. This is a feature which annuitants often find attractive relative to conventional annuities, where a death benefit is manufactured via the guarantee period.

Living annuities which are part of a retirement fund are subject to the Pension Funds Act, and Section 37C of the Act requires the trustees of the fund to make sure that dependants are taken care of before any non-dependant individuals who may have been nominated by the pensioner.

For living annuities which are no longer part of a retirement fund; unlike with pre-retirement savings within retirement funds where the trustees decide on how the death benefits should be distributed; with these living annuities the annuitants has the final say. The death benefit from the living annuity may be transferred to another living annuity, taken in cash or a combination of the two. If an annuitant does not nominate a beneficiary, then the investment balance will be transferred to his/her estate; whereas if you have it does not form part of the estate, instead being transferred directly to the nominee. Therefore executor's fees can be saved (unless you don't nominate a beneficiary).

Any lump sum death benefits paid to a beneficiary are taxed at a certain scale.

Purchase of living Annuity at Retirement

A living annuity may be purchased at retirement by transferring the proceeds of a pension, preservation or provident fund, into it.

Fees

There will be an investment platform through which you invest, and usually platform fees apply. Note that asset managers sometimes don't charge a platform fee if you invest in one of their portfolios (e.g. Sygnia).

The investment manager will charge a fee for the asset management services provided. There will also be various costs which accrue within the portfolio - e.g. brokerage, banking, securities transfer tax, custodian, audit and trustee fes.

You investment advisor fees may charge an initial fee up to a maximum of 1.71% (including VAT), as well are regular fees up to 1.14% p.a.

Payment fees may be charged whenever a payment is made.

FAQ

Question: May I withdraw nothing from my living annuity until I need the money in a few years time?
Answer: You must make at least one withdrawal a year, and that withdrawal must be at least 2.5% of your portfolio value.

Question: May I convert my living annuity to a conventional annuity?
Answer: Yes, usually you can. However, note that you cannot convert a conventional annuity back into a living annuity.

blog comments powered by Disqus

Due to regulations, our emails and this entire website should be considered as having been set up for entertainment purposes alone. Expect errors and omissions. Investment in shares and other financial instruments should be conducted by professional investment experts only. Any use of the information on my websites, emails and newsletters is at your own risk, and by using it you agree that the owners of our websites, authors and associated parties wont be held liable for any losses suffered as a result of using the information. None of the information should be construed as being advice. Our newsletters, articles, discussions and website are not an offering for any investment. It represents only our and others' opinions. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest. Illustrations, forecasts or hypothetical data are not guaranteed and are provided for illustrative purposes only. There are risks involved in buying or selling a financial product. Past performance is not indicative of future performance. Any investment values given are not guaranteed. Investment returns can be volatile. When investing there is always the risk of losing all or a substantial amount of your investment, as well as the risk of illiquidity. There may be advertisements on some pages on this website, and we may earn income from these advertisements. We may earn commission on products invested in or annuities purchased. We cannot attest to the accuracy of the material presented here, and opinions expressed may be changed without prior notice. In any event our liability will be limited to R1, and any court cases must take place in Cape Town. Free Investment Advice is the trading name of South Africa Travel Online CC, a licensed Financial Service Provider (FSP number 43555). You may contact us at invest@freeinvestmentadvice.org