Life Annuity vs Living Annuity
Annuities convert a lump sum, typically from retirement savings, into steady, ongoing payments. We’ll explore how annuities support income. Planning for those nearing retirement, providing a reliable financial foundation.
When retiring from a Regulation 28 fund, you’ll choose between two Retirement annuity options:
Living Annuity (investment-style product)
Life Annuity (guaranteed annuity, insurance-type product)
Both provide retirement income, but they differ significantly with regards to:
Flexibility
Features
Tax implications
Benefits
Choosing between them requires careful consideration of:
Your personal circumstances
Time horizon
Retirement goals
Living Annuity | Flexible Retirement Income
Benefits:
Income control: Adjust payments as needed to suit changing financial circumstances.
Investment flexibility: Modify your portfolio to optimize returns.
Growth potential: Investments can appreciate over time, boosting future income.
Tax advantages: Depending on jurisdiction and product, tax benefits may apply.
Legacy: Remaining balances can be inherited by beneficiaries.
Risks:
Investment management: Individuals bear responsibility for investment decisions.
Performance risk: Poor investment performance may reduce income.
No income guarantee: Outliving savings can result in lost income.
Inflation risk: Annuity income may not keep pace with inflation.
These flexible investments put you in control, allowing you to choose how your funds are invested and adjust your income withdrawals (between 2.5% and 17.5% annually) as needed.
While living annuities offer many benefits, they also come with investment risk, which falls on your shoulders as the annuitant. Like any investment, your living annuity is exposed to market fluctuations, but experienced fund managers can help adjust your strategy. However, ultimate responsibility lies with you to review and manage your investment approach.
Life Annuity (Guaranteed Income)
A Life Annuity is a type of insurance policy that provides retirees with a guaranteed lifetime income. By purchasing an annuity, individuals transfer investment risk to the insurer, ensuring a stable financial foundation. This arrangement pools retirees together, offering benefits such as longevity protection, higher initial pensions, and increased payments over time, known as “survival credits.”
Retirees can tailor their annuity to suit their needs, including:
Spousal continuation, which provides ongoing support after the policyholder’s passing.
Guarantee periods, ensuring minimum payment periods regardless of lifespan.
When selecting a life annuity, it’s crucial to balance starting income with potential increases. Policyholders can choose from various increase options:
With-profit annuities: Future increases align with the underlying investment portfolio’s performance, with a minimum bonus of 0%, preventing decreases.
CPI-linked increases: Increases are tied to the declared Consumer Price Index rate.
Fixed increases: Guaranteed annual increases at a predetermined rate (e.g., 5%).
Level increases: No future increases, providing a steady, unchanging monthly income.
This flexibility allows retirees to customize their life annuity according to their financial circumstances and preferences.
After the implementation date of 21 September, you will have the same rights of access to your benefits in the Vested Component, as you did before. You consequently have vested rights of access, which will include all existing rights relating to their accumulated Vested and Non-Vested benefits.
10% of this Vested Pot (not exceeding R 30 000) will be transferred (Seeded) to the Savings Pot implemented on 21 September 2024.
All retirement contributions from 1 Sept 2024 onwards will no longer go into the Vested Pot as it did in the past, as it will be split up:
– 1/3 will be allocated to the Savings Pot
– 2/3 will be allocated to the Retirement Pot
The Vested component, plus future growth thereon, will not be impacted by two-pot. You will not be able to make further contributions to this component but you are able to move the funds in your Vested Pot to Your Retirement Pot. (This decision needs to be made before 1 September 2025 and it is a once-off decision).
Fund rules will continue to apply to your Vested Pot regarding Resignation, Retrenchment and Retirement.
No contributions will go into this pot anymore, but your Vested pot will continue to grow with investment returns.
Consider an Investment payout as part of your Retirement Plan. Let M.A.L.Ishow you how!
Understanding Life vs Living Annuities
When you retire, you’ll have to decide what to do with your retirement savings. At that point, it’s vital to choose the annuity option that’s right for you.
Read the Old Mutual article HERE
Combining a Living and Life Annuity
Without a doubt, the living annuity (ILLA) is the preferred choice at retirement today, as it allows investors the flexibility to select their income level, manage the funds in which their retirement capital will be invested and thereby control their exposure to risky assetsThe value of some assets such as vehicles, will decrease as they are used and eventually wear out over time.. Another attractive point is that it addresses the desire of many investors to leave a legacyAn inheritance passed down to the next generation by allowing investors the option to nominate benefices to inherit the proceeds (in most cases their children).
Read the Glacier article HERE