Making better choices
is not always this easy

 

Newsletter Archive

The Ins and Outs of Compulsory Annuities

Posted On: Sunday, June 4, 2023

The Ins and Outs of Compulsory Annuities

“The best time to start thinking about your retirement is before the boss does.” (Anonymous)

If you’ve created wealth using Pension and Provident funds and/or Retirement Annuities and are nearing retirement, you’ll need to decide what you’ll do with the funds to provide you with an income in your golden years. The law stipulates that you must transfer at least two-thirds of the amount into a compulsory annuity: a Life or a Living Annuity. You can now also opt for a combo of the two.

The basics

  • A Life Annuity is an insurance-based fund which provides you with a guaranteed income for the rest of your life (or, in some cases, for a specific period – read the small print carefully!). A Joint Life Annuity provides an income until both spouses pass away.  
  • A Living Annuity is an investment-based fund which will provide you with an income based on your selected drawdown rate (between 2.5 and 17%).  
  • A Life Annuity cannot be converted into a Living Annuity, but you can change a Living Annuity for a Life Annuity.  
  • At retirement, you can split your retirement funds between a Life and Living Annuity.

How about a combo?

You can also split the funds and purchase a hybrid annuity. This solution to retirement funds is becoming increasingly popular.

The Life section provides you with a risk-free income for life, and the Living Annuity the ability to select the underlying assets and to pass down a legacy.

Now let’s dive into the details by looking at the options from a few different investment perspectives:

  • Wealth preservation

    The key difference between a Living Annuity and a Life Annuity is that a Living Annuity allows you to preserve your wealth as the capital does not cease when you die. The remaining capital of a Living Annuity passes on to your nominated beneficiaries, whom you can choose freely.

    Living Annuities do not form part of your deceased estate. When you pass away, the funds can be transferred directly to your beneficiaries and will not attract estate duty, thus making such products highly effective estate planning tools.

    The beneficiaries of a Living Annuity have almost immediate rights to the capital value and income from the fund. They can maintain the Living Annuity in their name, withdraw all the funds to use as they see fit, or make a partial withdrawal and keep the balance as a Living Annuity.

  • Level of income

    If you have a Living Annuity, you can select to draw down anything from 2.5% to 17.5% of the annual value of the fund. You can change this percentage once a year on the anniversary of the inception date. You also have a choice between an annual or monthly payment. In general, if you’d like to preserve the value of your Living Annuity capital, you need to invest in funds that outstrip inflation.

    If you have a Life Annuity, the income is determined by how much money you put in on Day One. You can usually select between a level or inflation-linked income. If you select a level income, it will be higher than an inflation-linked income in the initial years, after which the inflation-linked option will come into its own. Once you’ve made your selection, you cannot renegotiate it.

  • Asset allocation

    You can choose the underlying asset allocation within your Living Annuity. You can base the selection on your risk profile, age and drawdown amount. Some retirees who choose a Living Annuity invest a reasonably high proportion in low-risk investments and the balance in equity to ensure long-term capital growth. The funds can be rebalanced at any point.

    If you have a Life Annuity, you have no say in how the life assurance company invests the funds. Because they guarantee you an income, you don’t need to get involved.

  • Tax Both Life and Living Annuities are taxed as income at your marginal tax rate. Living Annuities are taxed at source (by the provider), and you can select the rate to match your marginal tax rate so that you don’t have to pay additional tax at the end of the year. When you rebalance the underlying investments in Living Annuities, Capital Gains Tax doesn’t apply. 

An important aside

The Law only requires you to transfer two-thirds of the wealth from your retirement funds into an annuity. If you withdraw the remaining one-third (or part thereof), lump-sum taxes apply on amounts over R550 000. (The threshold is lower if you’ve previously withdrawn from your retirement funds.)

There are times when lump-sum withdrawals make sense. For instance, you may like to pay off the balance of your mortgage.

What’s best for you?

Living annuities give you more choice than Life Annuities, allowing you to preserve wealth. But they also carry more risk. The onus is on you and your advisor to ensure that your income lasts in retirement and that there are opportunities for growth within the fund. Living Annuities are perfect for folks who want to be actively involved and are careful about their drawdown rates.

A Life Annuity can be good if you’re not a risk taker by nature and there’s plenty of longevity in your genes. They’re also suitable for people with significant other assets to leave to their heirs.

Horses for courses

When making a life-altering decision like this, knowledge is most definitely power. Gather as much information as you can and, equally importantly, know thyself. Once you think you’ve made your mind up, schedule an appointment with your advisor to see if they agree.

Please Register Below Or Login To Continue Reading.

Email
First Name
Last Name

2024

September 4 - Market Update: Christmas in September if Rates Come Down as Expected
September 3 - Why You Should Keep Your Investment Strategy to Yourself
September 2 - Aligning Your “Wheel of Life” – A Beginner’s Guide
September 1 - The Big Question: Should You Buy a Home or Rent One?
August 4 - Market Update: Magnificent Seven Lose Their Magnificence in July
August 3 - Unsung Heroes of Insurance: Four Types That Could Save You Money
August 2 - Do You Recognise Yourself in Any of These Client Case Studies?
August 1 - Three Pot System 101: What You Need to Know Before 1 September
July 4 - Market Update: Financial Markets Welcome GNU 2.0 and New Cabinet
July 3 - Busting the Post-Retirement Jargon
July 2 - Safeguard Your Money: Look out for Phishing Scams
July 1 - Why the Marshmallow Effect Could Derail Your Retirement Plans
June 4 - Why Emotions and Investing Don’t Always Mix
June 3 - Demystifying Retirement Planning Lingo
June 2 - The Sandwich Generation: How Can You Deal with Family Always Asking You for Money?
June 1 - How the Elections May Impact Markets in the Months Ahead
May 4 - Market Update: Geopolitical and Economic Risks are on the Rise and Investors are Concerned
May 3 - Need to Know: Annualised Returns Versus Internal Rates of Return
May 2 - Investment Jargon 101: Your One-Stop Primer
May 1 - Do You and Your Partner Share the Same Money Values?
April 4 - Market Update : Will They, Won’t They? The Case for Lower Interest Rates Improved in March.
April 3 - Unpacking Diversification: What Really Counts?
April 2 - Zen and the Art of Financial Planning
April 1 - The Secret to Solving the Financial Rubik’s Cube? Consistency.
March 4 - Market Update: Initial Investor Vote of Confidence Dissipates in Wake of Budget
March 3 - The Most Important Part of a Financial Plan: Room for Error
March 2 - Diversification: Free Lunch or Fool’s Gold?
March 1 - Budget 2024: What it means for you
February 5 - Budget 2024: The Minister of Finance Wants to Hear from You!
February 4 - Market Update: US and SA Markets Diverge on Differing Investor Sentiment
February 3 - Tax Tip: Must-Do Top Ups in February
February 2 - Should Investing Be This Sexy?
February 1 - Is There Really Much Difference Between Investing and Gambling?
January 4 - Market Update: What Lies Ahead for 2024?
January 3 - Think You’re a Rational Investor? Think Again
January 2 - Did 2017 Change the Way You Invest?
January 1 - How to Avoid Getting Burnt by the Next Investment Bubble in 2024

2023

December 4 - Stock Markets Break Three-Month Losing Streak
December 3 - The Differences Between Life and Living Annuities
December 2 - Should you be an Optimist or a Pessimist With Your Money?
December 1 - How to Give Meaningful Gifts This Festive Season
November 4 - Market Update: The Effects of War, Higher Interest Rates and China on Equities
November 3 - Why do People Invest in Property?
November 2 - Retirement Planning: The ins and Outs of Nominating Beneficiaries
November 1 - Retiring Well is About More Than Money
October 4 - Why Your Marital Contract Really Matters
October 3 - How to Avoid Being Scammed by Email Fraudsters
October 2 - The Stock Market Indices to Watch When Monitoring Equity Performance
October 1 - Why do Some People Have a Problem Spending Money?
September 4 - The Difference Between Being Rich and Being Wealthy
September 3 - The Ins and Outs of Buying Offshore Property
September 2 - A Good Budget Doesn’t Limit Spending, it Prioritises it
September 1 - Should you pay off your home loan?
August 4 - How to Take Advantage of the Donations Tax Allowance
August 3 - Five Reasons why a Financial Windfall Must be Managed Carefully
August 2 - What’s Cooking with the Three-Pot System?
August 1 - Make Sure Your Family is Financially Prepared for When You Pass Away
July 4 - A Must-Have for Couples who Choose not to Tie the Knot
July 3 - Can Gratitude Make you Feel Better About Your Money?
July 2 - Four Ways to Make the Most of Retirement
July 1 - How to Invest When There’s So Much Bad News
June 4 - The Ins and Outs of Compulsory Annuities
June 3 - Who is Influencing Your Financial Decisions?
June 2 - R is for Rebalancing
June 1 - Don’t let Money Ruin Your Relationship
May 4 - Five Ways to Teach Kids About Money
May 3 - Much Ado About Risk
May 2 - Living Wills: A Must Have, Despite the Grey Areas
May 1 - What is True Wealth?
April 4 - How the 2023 Budget Will Impact Your Pocket
April 3 - Three Financial Imperatives for Women in Divorce
April 2 - Should You Ask ChatGPT for Financial Advice?
April 1 - Compound Interest: The Eighth Wonder of the World
March 4 - How a ‘Safe’ Fixed Deposit Might Still be Risky
March 3 - Thinking of moving to Australia? Bear these numbers in mind
March 2 - Avoid These 6 Barriers to Wealth Creation
March 1 - How Good do You Think You Are at Investing?
February 4 - Is Money Stress Taking a Toll on You?
February 3 - Why an Endowment is One of the Best Ways to Invest Offshore
February 2 - Why too Much of a Good Thing Can be a Bad Thing
February 1 - Invest With FIRE and Never Look Back
January 4 - Why Lottery Winners End up Broke: The Importance of Your Financial Context
January 3 - Discover the Freedom of a Tidy Portfolio
January 2 - Why You Absolutely Should be Investing in Education
January 1 - Four Simple Steps to Start the Year on the Right Financial Foot

2022

December 4 - What is This Volatility Risk People are Always Talking About?
December 3 - Why You Need to Watch Out for The Butterfly Effect
December 2 - 6 Ways to Achieve Financial Freedom
December 1 - Three Books for the Holidays
November 4 - The Question of Loyalty
November 3 - Why do we Even Have Bull and Bear Markets?
November 2 - Should I Buy a Holiday House?
November 1 - Put Stocks, Rather Than Socks, Under the Tree This Christmas
October 4 - Can You Take Out Life Insurance on Someone Else?
October 3 - Loss Aversion and Lifestyle Creep – How Behaviour Influences Saving
October 2 - Why Timing Might be Everything in Retirement – Especially in a Bear Market
October 1 - Get Rich - Stay Rich Eight Mistakes Wealthy People Never Make
September 4 - Capital Gains Tax: 10 Common Questions Answered
September 3 - The Risk That Many Investors Don’t Think About
September 2 - Much Ado About Regulation 28 and the Private Investor
September 1 - The “Two Bucket” Retirement Savings System: What is it and Why is it Important?
August 4 - Retirement Planning for Age-Gap Couples
August 3 - A Simple “50-15-5” Budget Hack for Women (and Men!)
August 2 - Does Your Family Need a Constitution?
August 1 - Women’s Month: Three Ways You Can Improve Your Money Health
July 4 - Five Things to Check When a Loved One Passes Away
July 3 - Rules of Financial Planning For a Special-Needs Child
July 2 - Why Your Financial Plan Should Cater For Possible Dementia
July 1 - Why Inflation is the Most Important Investment Benchmark
June 4 - How Relevant Is The 4% Rule of Thumb These Days?
June 3 - Why You Should Treat Your Finances Like Your Health
June 2 - Is Your Business Good Retirement Capital?
June 1 - With the Limits Raised, How Much Should You Invest Offshore?
May 5 - Quote of the Month: Challenging the Rejection of an Insurance Claim
May 4 - Financial Products: The Less You Understand, the More You Pay
May 3 - The Miracle of Investment Debit Orders
May 2 - Five Things to Think About as Interest Rates Rise
May 1 - Stay Calm When the Bear Prowls
April 5 - Quotes of the Month – The War in Ukraine
April 4 - Smart Ways to Give: During and After Your Lifetime
April 3 - Take These Three Steps to Break the Money Shame Spiral
April 2 - When Things Don’t Go According To (The Financial) Plan
April 1 - What Amazon and Ford Can Tell Us About Diversification
March 4 - Quotes of the month – What the NFT?
March 3 - How to Avoid Losing Your Life’s Savings to a “Tinder Swindler”
March 2 - The Different Ways to Invest: What Does It All Mean?
March 1 - Three Reasons You Shouldn’t Wait to Talk to Your Kids About Money
February 6 - Quote of the Month – Don’t Cash In Your Retirement Savings
February 5 - Should You Top Up Your Retirement Annuities Now?
February 4 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial Distress
February 3 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial Distress
February 2 - Three Reasons an Insurer Could Cancel Your Policy
February 1 - Investing: Men and Women See Things Differently
January 4 - Quote of the month – Stay invested!
January 3 - What SARS Says About Crypto Assets and Tax
January 2 - Three Ways to Leave a Legacy, And Not Just an Estate
January 1 - Red-Carding the Myth of The Rational Investor