LIV­ING AN­NU­ITIES

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

Liv­ing an­nu­ities, not to be con­fused with re­tire­ment an­nu­ities (RAs – see “Re­tire­ment funds”, be­low), are used as a post-re­tire­ment in­vest­ment ve­hi­cle, and you would typ­i­cally trans­fer funds from an RA, pen­sion, prov­i­dent or preser­va­tion fund to a liv­ing an­nu­ity. These in­vest­ments are reg­u­lated by the Fi­nan­cial Ser­vices Board and the Long Term In­surance Act.

Liv­ing an­nu­ities are an al­ter­na­tive to tra­di­tional an­nu­ities. With a tra­di­tional an­nu­ity, a life as­surer guar­an­tees you a fixed pen­sion for life. With a liv­ing an­nu­ity the risk of your cap­i­tal be­ing suf­fi­cient to pro­vide you with an in­come for life lies with you, be­cause you must choose the un­der­ly­ing in­vest­ment.

As with re­tire­ment funds, you can­not cede a liv­ing an­nu­ity as se­cu­rity and it does not nec­es­sar­ily form part of your es­tate when you die. You can nom­i­nate a ben­e­fi­ciary.

This type of in­vest­ment has its lim­i­ta­tions, Ger­rit Viljoen says. You can­not make any fur­ther monthly con­tri­bu­tions, you can­not ac­cess your funds in the form of a lump sum, and each year you must draw down in­come at a rate be­tween 2.5 and 17.5 per­cent of your cap­i­tal in­vest­ment. You can only amend the per­cent­age in­come you draw down once a year on the an­niver­sary of the in­vest­ment.

The in­come you draw down is sub­ject to nor­mal in­come tax rates.

It is im­por­tant to care­fully cal­cu­late your draw­down rate: if the in­come level you se­lect is too high, your in­come may not be sus­tain­able over the length of your re­tire­ment.

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