It should be noted first off that Living Annuities are soon to be renamed Retirement Income Drawdown Accounts for those who have not heard the term in the Industry just yet.
When you retire and you receive your proceeds from your pension fund, you are obliged to purchase an annuity. Your pension fund contributions had tax incentives while you were working and at Retirement you are faced with two choices.
You can invest in an investment linked living annuity or a guaranteed annuity. A guaranteed annuity is essentially an insurance product where the insurance company takes a risk based on how long they expect you to live and offer a guaranteed income to you for the rest of your life. An investment linked Living Annuity you are taking the risk that the amount will last you as long as you live with no guarantees, so if you live longer than what you had planned to live while structuring your retirement investment portfolio, you may find yourself coming up a little short.
While Investment linked Living Annuities are your risk, you are also only entitled to draw on the capital within certain limits. In other words, you cannot simply draw as much as you like whenever you like, Living Annuities are intended to see you through to the end of your life and are limited to between 2.5% and 17.5% of the residual annual value of the savings.
There are two situations in which the total amount available can be withdrawn from the fund and that is when the total available is less than R75 000 or you have died and the balance available, irrespective of the amount is claimed by a beneficiary. The beneficiary in the case of your death has two options, he can continue to receive an income from your Annuity investment or he can withdraw the total amount left in the fund. The retirement Annuity calculator will help you determine payouts.
Living Annuities are soon to be renamed and will become known as Retirement income drawdown accounts which better describes the nature of the underlying investment nature of the product. The other reason for the product being renamed is that it will open up the sales channels to increase the competition in retirement investments where administration fees and management fees have been eroding retirement savings.
You will soon be able to buy retirement income drawdown accounts directly from banks, unit trust management companies and even marketers of ETF products. This will dramatically increase competition in the Annuity market and should drive down costs and fees on retirement savings.
It is always important to revisit your retirement plan at least once a year to keep abreast of the changes to legislation and taxes affecting retirement Investments.