Life annuity or living annuity? It all depends on your individual needs and circumstances
25 July 2024 - 05:00
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
I need to decide whether to buy a living or a life annuity with my retirement savings. What are the benefits of each?
— Julie K
Answer:
There are many debates over choosing a living or life annuity (or a hybrid model). Your personal needs and unique portfolio need to be analysed to provide the perfect solution. We live in an unpredictable world, and our investment portfolios need to accommodate change (in legislation, in taxation, as well as investment strategy). For this reason I prefer a living annuity, in combination with a liquid investment for emergency needs. But there are instances when a hybrid or life annuity might be more suitable, depending on the wealth strategy, income requirement and fund value provided.
Guaranteed annuity (life annuity)
This is suitable for those who wish to receive a guaranteed income for the rest of their lives. It’s important to consider the following:
No changes can be made to the agreed-upon amounts after contract initiation, subject to the cooling-off period and terms as specified;
The plan cannot be surrendered or ceded;
The income you receive is guaranteed and is not affected by the performance of the market;
You can choose to receive the income annually, quarterly or monthly;
The income is determined by factors such as your age, gender, market interest rates and guaranteed terms selected;
Guaranteed terms of life annuities vary between five and 20 years;
In the event of death, the nominated beneficiaries can choose whether to receive the equivalent future income during the guaranteed term as a lump sum or as an income stream for the remainder of the guaranteed term. If, however, you pass away after the guaranteed term, no benefits for income or capital will be payable to your beneficiaries;
The income quoted provides for an annual increase that is determined beforehand (for example, at 5%). Bear in mind inflation could be higher than the specified percentage. The increase is set and there is no option to change it in the future;
The quotation is valid for a fixed period. If the transfer takes longer than the period the quotation is valid for, a new quote will have to be approved and rates may differ;
It is possible to move from a living annuity product to a life annuity product. It is not possible to move from a life annuity into a living annuity product; and
You do not have the option to take additional lump sum withdrawals on this investment.
Tax considerations: income received from a life annuity will be taxed according to your marginal tax rate.
Living annuity
This is for people who would like flexibility in selecting their income level and underlying investment instruments, and those who would like the proceeds of their investment paid to their beneficiaries upon death.
It’s important to consider the following:
You can nominate beneficiaries who, in the event of your death, will have the option to continue with the current living annuity, take an amount as a lump sum, or a combination of the two, subject to applicable tax;
You can select an annual income percentage between 2.5% and 17.5% of the fund value. The income can be paid annually, semi-annually, quarterly or monthly;
The growth within the investment is tax-free, while the income payable is taxed in accordance with your personal income tax rate;
You can decide on the underlying asset and fund allocation;
The investment growth is market-related and it’s possible that the growth of the investment will underperform expectations. You could also outlive the investment’s ability to provide sufficient income; and
You do not have the option to take additional withdrawals on this investment.
Tax considerations: the growth within the investment is tax-free, while the income payable is taxed according to your nominal tax rate. Upon death, if the beneficiaries choose to take the whole or part of the value of the investment as a lump sum, they will be taxed according to the retirement tax tables.
I always recommend a thorough analysis of your unique portfolio and needs as a first step. I do, however, prefer the greater flexibility of a living annuity, and there’s the certainty that your loved ones will receive this eventually. Investment returns on a living annuity are typically higher than life annuity rates because we have the benefit of wealth management — and the ability to change strategy as economic and market cycles change.
The most important strategy at retirement is ensuring your capital remains in place and remains relevant — this means keeping up with (actual) inflation — over and above your drawing, for 30 to 40 years.
Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
READER QUESTION OF THE WEEK
YOUR MONEY: Solving the annuity dilemma
Life annuity or living annuity? It all depends on your individual needs and circumstances
Question:
I need to decide whether to buy a living or a life annuity with my retirement savings. What are the benefits of each?
— Julie K
Answer:
There are many debates over choosing a living or life annuity (or a hybrid model). Your personal needs and unique portfolio need to be analysed to provide the perfect solution. We live in an unpredictable world, and our investment portfolios need to accommodate change (in legislation, in taxation, as well as investment strategy). For this reason I prefer a living annuity, in combination with a liquid investment for emergency needs. But there are instances when a hybrid or life annuity might be more suitable, depending on the wealth strategy, income requirement and fund value provided.
Guaranteed annuity (life annuity)
This is suitable for those who wish to receive a guaranteed income for the rest of their lives. It’s important to consider the following:
Tax considerations: income received from a life annuity will be taxed according to your marginal tax rate.
Living annuity
This is for people who would like flexibility in selecting their income level and underlying investment instruments, and those who would like the proceeds of their investment paid to their beneficiaries upon death.
It’s important to consider the following:
Tax considerations: the growth within the investment is tax-free, while the income payable is taxed according to your nominal tax rate. Upon death, if the beneficiaries choose to take the whole or part of the value of the investment as a lump sum, they will be taxed according to the retirement tax tables.
I always recommend a thorough analysis of your unique portfolio and needs as a first step. I do, however, prefer the greater flexibility of a living annuity, and there’s the certainty that your loved ones will receive this eventually. Investment returns on a living annuity are typically higher than life annuity rates because we have the benefit of wealth management — and the ability to change strategy as economic and market cycles change.
The most important strategy at retirement is ensuring your capital remains in place and remains relevant — this means keeping up with (actual) inflation — over and above your drawing, for 30 to 40 years.
Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch
We’d like to hear from you. E-mail us on yourmoney@fm.co.za
ALSO READ:
YOUR MONEY: Must I pay tax on interest twice?
YOUR MONEY: Sound tips for a rookie investor
YOUR MONEY: Are retail bonds a safe investment?
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Most Read
Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.