Upon retirement most of us are, or will be, dependent on our accumulated retirement capital for an income. It is at this time that your
• Retirement Annuities,
• Pension funds,
• Provident funds and/or
• Preservation funds
will purchase a Living Annuity income.
Once you have purchased a Living Annuity you are required to draw an annual income from the product. This income has to be within the range of 2.5% – 17.5% of the capital invested. Income can either be specified as a percentage or as a nominal amount but has to comply with the specified range.
Your income level is specified once every year which is an important consideration as will be unable to make any additional withdrawals should you require more money.
We recommend a MAXIMUM income level of 5% per annum as this should allow the capital to grow despite the income being drawn. This growth will prove crucial over time as your income growth will need to keep pace with (and should preferably exceed) inflation. Bear in mind that you could potentially be dependent on this income for more than 30 years.
When you are reliant on your Living Annuity income we believe it imperative that you understand your investments and that you know what to expect from your investments on an ongoing basis. To accomplish this we meet with all our Living Annuity clients at least twice every year.
The two most important attributes of a Living Annuity investment portfolio are:
• low volatility and
• sufficient growth
The low volatility is imperative as this will avoid an income that fluctuates dramatically every year. You will however need to incorporate a sufficient level of higher risk assets to drive returns.
All growth and distributions within your Living Annuity is tax free. The income you draw will however form part of your gross annual income and as such will be taxed at your personal income tax rate. This is also an important consideration to bear in mind when setting your income level.
You are able to nominate a beneficiary within the Living Annuity product. The beneficiary will have the choice of continuing to draw an income from the Living Annuity, which will form part of their gross annual income and be taxed according to their personal income tax rate, or to withdraw the capital as a lump sum. Should the capital be drawn as a lump sum, the capital will be taxed according to the tax tables applicable to the deceased and will be dependent on any previous withdrawals made.
Due to the importance of growth within a Living Annuity it is important that your returns are not reduced due to fees being higher than necessary. The various investment platforms offer different fee arrangements depending on the amount invested and on the funds you choose to use. We will always recommend the most cost effective option that does not unnecessarily constrain your investment options.
Should you already be invested on a Linked Investment Service Platform which is not the most cost effective you are able to transfer your Living Annuity in accordance with Section 37(2) of the Long Term Insurance Act.
If you have any further queries regarding Living Annuities please feel free to contact us, alternatively if you are already invested in a Living Annuity and wish for us to review your portfolio we would also be happy to assist. – Please note that this may incur a fee –