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The advantages of choosing a living annuity are that if the funds are managed properly and a prudent level of income is withdrawn the investor can leave a legacy for future generations.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.