Guaranteed Annuity or Living Annuity?

Guaranteed Annuity or Living Annuity

At retirement, investors are faced with two options when deciding on purchasing an annuity. Should I purchase a guaranteed annuity or a living annuity?

A guaranteed annuity is underwritten by a life insurance company who guarantee to provide the investor/life assured with a fixed annuity income for the rest of their life.

Guaranteed annuities can be structured so that the annuity increases annually by a fixed amount and investors can stipulate whether to attach an additional life to the policy to continue paying the annuity until the death of the second life. This is usually the case where there is a need to provide an income for a spouse.

With a guaranteed annuity, there is no investment risk attached to the annuity. The life company undertakes to pay the annuity until the life assured’s death. Upon the death of the life assured the company ceases all payments and the investment ends. With a guaranteed annuity, there is no ability to leave a legacy to any beneficiaries.

With a living annuity, the investor purchases an annuity and is then responsible for the level of income they choose as well as how the underlying funds in the investment are invested. Currently, investors are able to choose an income annuity between 2.5% – 17.5% of the capital value per annum. On the anniversary of each year, the investor can reassess their income level and increase or decrease the amount of income they receive.

With a living annuity, the investment risk becomes the investor’s responsibility. Should the investor withdraw a greater amount of income than the investment is generating then the capital value of the investment would decrease. If the annuity was less than the investment returns the investment would increase.

Investors in a living annuity are not constrained as to how the funds are required to be invested and can tailor their investment to best suit their retirement needs and risk profile.

With a living annuity investors are able to nominate a beneficiary and upon their death, the funds are transferred into the beneficiaries name and they can then choose whether to take the proceeds in the form of a lump sum, receive a monthly annuity or take a combination of both.

The advantages of choosing a living annuity are that if the funds are managed properly and a prudent level of income is withdrawn the investor can leave a legacy for future generations. Living annuities are not governed by the Pensions Fund Act which allows investors control over who they nominate and can also be used as an effective estate duty planning tool.

Fund of the Month: Nedgroup Investments Property Fund

The Nedgroup Investments Property Fund is a specialist property fund that provides investors with income generation and capital appreciation over the long term. This fund is suitable for investors who can withstand increased volatility but are looking to maximise their returns over an investment horizon of 7 to 10 years. The Fund has a long term track record and has provided investors with a return of 12% since inception of the Fund.

The South African Property Index is currently down 20% for this year. This presents investors with the opportunity to buy ‘Low’. The expected income return on the Fund for the next year is forecast to be 13.2%.

By incorporating the Nedgroup Investments Property Fund into a tax-free investment, investors can make provision to ensure that when they require the income it is received tax-free! For more information on the Fund, its income yield or to open a tax-free investment please click on the link.

October 2018: Presentation invite and nominating beneficiaries

Invitation to an Investment Presentation

2018 has been a tough year for investments! There has been political upheaval throughout the world and global stock markets have generally declined making important investment decisions very difficult. To try and make sense of the current investment climate join Rod Hunter, Sales Manager of Investec Asset Management as he provides a market update and reviews the key challenges facing South African investors in 2019.

Difference between beneficiary nominations in a Retirement Annuity and a Living Annuity

Retirement Annuities are governed by the Pensions Fund Act. Investors are able to nominate beneficiaries however, the Trustees appointed for the Retirement Annuity Fund consider the individual client’s circumstances and whether or not the client has any dependents. The Trustees then decide as to how the funds should be distributed.

Living Annuities are governed by the Long Term Insurance Act. This means that investors can nominate beneficiaries and on the death of the annuitant the benefit will be paid to the beneficiary. The beneficiary then has the option of choosing how they wish to receive their benefit. This can be in the form of a lump sum or the beneficiary can choose to receive a monthly income or a combination thereof.

Both Retirement Annuities and Living Annuities are exempt from estate duty in terms of section 3(2) of the Estate Duty Act, regardless of whether an annuity or a lump sum was chosen by the beneficiary.

Office Closure

Our offices will be closing on the 14^th December 2018 and reopening on the 7^th January 2019. Should you have any urgent queries/needs during this period you can contact Greg on 0027 61 017 3468.

“It does not matter how slowly you go as long as you do not stop” Confucius

September 2018: Retirement Annuities continued…

Retirement Annuities

In last month’s newsletter, we looked at the how Retirement Annuities. To read last month’s newsletter please click here. This month we look at two practical applications as to how investors can benefit by making use of retirement annuities.

The first example is for investors who are over the age of 55 and have not made use of their full R500, 000 tax-free benefit when retiring from their retirement fund savings. The second example illustrates the ability to create a lasting legacy for your children or grandchildren.

Paying less and getting more.

Let’s look at the first example:

Jane (56) is currently working, and her income for the year is R500, 000. Jane has previously retired from one of her RA’s and withdrew an amount of R150, 000 as a cash benefit. Therefore Jane still has R350, 000 that she could claim tax-free.

Jane decides to contribute R100, 000 to a new RA. This reduces Jane’s taxable income to R400, 000. Jane then decides to retire from her new RA. As the value is below R247, 500, Jane can access the entire benefit as a cash lump sum. Jane withdraws the R100, 000 and receives this benefit free of tax.

Jane has reduced her tax liability by R34, 836 and she can retire from her new RA and take the R100, 000 tax-free.

Setting up a lasting legacy for your children or grandchildren.

For investors who are wanting to provide their future generations with real wealth, an RA is a fantastic product to make use of.

Let’s have a look at the example:

Jack has a baby girl (Lucy). Jack decides to contribute R300 into a retirement annuity for Lucy. Jack invests into “Fund A” which delivers long-term returns of 10% per annum. By the time Lucy is 18 she will already have over R180, 000 saved up. Lucy gets a job and takes over the contributions from her dad. Lucy contributes R500 per month. When Lucy comes to retirement (55) she will have accumulated over R9, 500, 000.

By starting early investors can take advantage of the wonderful benefit that is compound interest! Investors can contribute from as little as R300 per month into a retirement annuity for their loved ones. Imagine if someone had started an RA for you when you were born!

Fund of the month: Prescient Income Provider Fund

The Fund of this month is the Prescient Income Provider Fund. This is a multi-asset income fund with the primary focus being on providing investors with a regular monthly income. This Fund is suitable for Investors seeking stable real returns and aiming to maximise income. This Fund targets returns of inflation (CPI) + 3 % over the long term.