In essence there are three main choices to consider, a Living Annuity, a Life Annuity or a combination of these. This article hones in on the Living Annuity option and some important things to consider when choosing this investment to house your hard-earned retirement money.
Upon reaching the legislatively regulated retirement ages from various retirement funds (Pension, Provident, Preservation and Retirement Annuities) investors can transfer their fund values in these retirement funds into a Living Annuity, to provide them with a source of income.
The money from retirement funds are placed in recommended underlying investment funds within the Living Annuity (LA). These underlying funds strive to generate capital growth while also providing an income to the investor.
An investor selects an income amount to withdraw from the LA of between 2.5% and 17.5% of the value of the funds at the LA inception date. These draw rate percentages are the current regulatory limits applicable to all Living Annuities.
This chosen income draw rate can only be changed once a year at the LA inception anniversary date subject to the 2.5% and 17.5% limitations. In other words for a period of one year at a time no changes can be made to the amount of income paid to investors. A year in terms of a LA runs from the LA policy inception date to the anniversary of the LA policy inception date and then each year at a time thereafter.
The LA policy inception date becomes the LA policy anniversary date in time and this date cannot change even if the LA was to be transferred to another service provider.
When the investor passes away the balance of funds (capital) that remain at their death within the LA can be left to their nominated beneficiaries.
Some Salient Features of a Living Annuity
The Golden Rule
If you draw more from the LA than the funds can grow, you could ultimately end up in serious trouble, to the very point where you can run out of money to sustain your lifestyle.
It all comes down to prudent management of your draw rate and growth in the LA as the examples below illustrate.
The Good
These figures are for illustration purposes only.
The Bad
These figures are for illustration purposes only.
If managed wisely a Living Annuity is an excellent investment that can provide you with an income for life and even leave something for future generations. Always seek solid financial advice before making any investment decision.
Gareth van Deventer CFP®
Technical Advice Service Manager