MONEY CLINIC: I'm looking at investing R14m into a living annuity; what are my options?

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(iStock)

A retired Fin24 user is looking to invest in a retirement annuity to provide him with a monthly payout to ensure that he lives within his means.

He writes:

I am interested to invest in a Living Annuity. I am currently 64 years old and have retired on 31 July 2019.

I have the following funds available:

  • Pension Fund - R 3 899 742
  • Provident Fund - R 10 178 069
  • Total - R 14 077 811

I would like to take a cash payment of R500 000.

Please assist me with advise as to where can I invest  for an income to ensure that I don’t outlive my lifestyle.

Andre Tuck, Senior Investment Consultant at 10X Investments responds:

Please refer to the 10X Living Annuity Illustration in terms of the information provided by the client: 

• Client A – Investment value used is R13 577 811

• Tax-free portion of R500 000 taken at retirement

• Monthly income selected is 5% income = R56 575 (before tax)

• General rule is that sustainable income is 5% or less to ensure investment value stays intact.

10X Living Annuity Quote - ...

The Living Annuity allows you to take charge of your retirement savings, with key benefits such as income flexibility and retention of your capital for your estate.

When you’re deciding who to invest your money with, things to consider include these five items:

  • The asset manager’s track record and returns – Investment philosophy and minimum five-year and longer track record should be looked at as starting point;
  • What fees you would have to pay – very important, as high fees normally have a negative impact on retirement capital;
  • Sustainable income drawdown – important to ensure you do not run out of retirement capital – 5% or less seen as adequate and flexible to amend on an annual basis (if required)
  • How your money would be invested? – this is the asset allocation and the weighting in a range of funds or into a solution instead;
  • Who else has invested with them – important as it gives an indication of sound due diligence done.

A Living Annuity (LA) is a financial product that pays you a regular income. You can choose between two types of annuities at retirement: a Guaranteed Annuity (GA) or a Living Annuity (LA).

As member of a Pension Fund, you must use at least two-thirds of your fund proceeds at retirement to purchase an annuity or income. For a Provident Fund, you are allowed to take the full value (3/3) but this will obviously have tax implications as you will be taxed according to the SARS Retirement Tax Table.

The Guaranteed Annuity (GA) is an insurance product that you purchase from a life assurance company. The life assurer guarantees to pay you a specified monthly pension for the rest of your life. This effectively insures you against longevity risk (the risk that you live longer than expected) as well as investment risk (depleting your capital too soon due to inadequate investment returns).

This pension is paid until you die. The drawback is that your capital dies with you, and no money passes onto your heirs. That is your risk: you (or, rather, your heirs) forfeit your savings in the event that you die sooner than expected, unless the contract incorporates a guarantee period or a spousal benefit. To avoid this risk, you can instead choose a living annuity.

The Living Annuity (LA) is, in essence, an investment product. It transfers the risk and responsibility of securing an adequate income for life onto your shoulders. In return, you have greater investment and income flexibility and your heirs inherit whatever is left of your capital after your death (i.e. your capital does not die with you)

With a Living Annuity, you decide how to invest your savings, within the basket of investments offered by your product provider. Unless you have the necessary investment expertise, you should consult a reputable retirement planning tool or financial advisor on the appropriate draw-down rate and asset allocation.

Living Annuities are mainly sold through Lisps (linked-investment service providers). Lisps are essentially administrators who invest your money according to your instructions. They then track the performance of your investments. Lisps do not provide financial advice and you normally have to deal with them through a registered financial adviser.

Living Annuity rules: A living annuity can only accept proceeds from a retirement fund or another living annuity. You can add the proceeds from a retirement fund to your existing living annuity. You can transfer your living annuity from one service provider to another but you cannot combine two living annuities into one.  

Every year you must draw a pension from your investment. This so-called draw-down must be at least 2.5% but no more than 17.5% of the annual value of the residual capital at the policy anniversary date. Your draw-down rate can change from year-to-year, but you must make your election before the policy anniversary date. You can choose to receive your income monthly, quarterly, semi-annually or annually.

You can switch a Living Annuity into a Guaranteed Annuity at a later stage (although you cannot do the reverse). You can take out both types of annuities concurrently or purchase a composite annuity (both living and guaranteed) under a single life assurance policy.

Your nominated beneficiaries inherit any residual capital after your death; they can choose to receive a lump sum, an ongoing annuity or an accelerated annuity (paying out over five years). If you do not nominate any beneficiaries, the money will fall into your deceased estate and be subject to your testamentary wishes.

Tax benefits: The transfer to your living annuity is tax-free. You are not taxed on the investment return, instead you pay income tax on your withdrawals per the normal income tax tables. The income tax is withheld by the annuity provider and paid over to SARS. Your Living Annuity (other than any amounts that relate to retirement fund contributions not claimed for tax) is not subject to Estate Duty. Any residual capital is taxed either per the retirement lump sum or the income tax table (depending on whether beneficiaries choose to receive a lump sum or annuity income).

Costs are an important consideration with any investment, also for a Living Annuity. Most Living Annuities charge initial fees, annual fees, transaction charges and investment management fees (on top of any advice and platform fees you may pay). In total, these charges can be as high as 2.5% pa of your capital. Such high costs accelerate the depletion of your savings. Always ask your adviser or provider for the Effective Annual Cost (EAC) to determine ALL layers of fees disclosed.

At 10X, the fee is calculated based on investment value on a sliding scale and will be less than 1% in total for Living Annuities. The 10X fee on an investment amount of R13 577 811, as in this example, would be 0.63% (including VAT).

Compiled by Allison Jeftha. 

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Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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