What our retirement will look like is determined by the actions we take today. After all: when you’ve grown accustomed to a certain lifestyle, you won’t want to sacrifice that in your old age. For the right investor, a well-structured living annuity might just be the answer to enjoying comfortable golden years.

An independent financial advisor discusses why his client’s living annuity requires strategic asset allocation.

Deciding how and when to retire can be one of the most stressful events in an investor’s life. Therefore, it’s crucial to take the time to understand the importance of cash flow planning when structuring your living annuity and aligning your assets within it.

The living annuity essentials

Living annuities provide a way to receive an income, even after retiring, by using the capital from your retirement funds. Part of their appeal lies in their flexibility – more on that in a bit. As an annuitant (i.e., the person benefitting from an annuity), you can choose how much income you want to receive. Plus, it allows you to protect your savings and to grow further by investing in assets like unit trusts.

A tax-savvy investment choice

When it comes to dividends earned, as well as any other investment gains, living annuities offer quite the benefit. These earnings aren’t subject to tax. Although, keep in mind that when the income you withdraw from the annuity surpasses the tax threshold, you get taxed as per regular rates.

More flexible than a life annuity

Private investors often experience confusion between living and life annuities. This is due to their similar names and the fact that both are related to retirement income. However, these post-retirement vehicles couldn’t be more different. It’s vital to inform new investors of each investment type’s distinct characteristics to ensure they make the best decision for their unique portfolio needs.

In the case of living annuities, the investment belongs to the annuitant. They have full control over how the investment is structured and can make changes to the portfolio as desired. On the other hand, life annuities are typically considered insurance policies where an insurance company provides the annuity payments. The distinction lies in both the investments’ ownership and control.

Since living annuity investors have complete freedom over how and in what they invest their money, the responsibility to ensure they have enough funds to last the remainder of their lives falls to themselves. Because insurance companies manage life annuities, investors enjoy a guaranteed income for life in exchange for a retirement lump sum or series of premium payments.

It’s worth considering that a living annuity allows you to switch to a life annuity. Yet the reverse isn’t possible. Because a life annuity is a form of insurance policy, it uses the capital from your investments and thus can’t become a living annuity.

The ideal investment candidate

Those looking to back out of their retirement, pension, preservation, or provident annuity funds can opt to buy a living annuity instead. This essentially means that should you have investments in a registered retirement fund, you can choose to invest in a living annuity.

However, take note that you can’t use funds from a discretionary investment to purchase a living annuity. This is because they are specifically designed for investing in retirement benefits, regulated by the Pension Funds Act.

Living annuity considerations

No investment is completely risk-free, and anyone interested in living annuities should explore the potential hazards. Among the most noteworthy risks is withdrawing too much income from your living annuity, which shrinks your capital at an accelerated rate. This could result in your future income failing to beat inflation and you outliving your investment.

Another significant hazard is compiling your own portfolio without guidance from an independent financial advisor or established global investment management firm. No returns or investment values are guaranteed to flourish: they may, in fact, stagnate or drop. Ultimately, an investment account’s value depends on the underlying investments’ market value. When returns are poor or the markets decline, your capital may shrink or fail to outperform inflation again.

Living annuity benefits

Opting to embrace a living annuity during retirement can hold numerous benefits, the top three being:

  1. As long as you adhere to ASISA standards, you have flexibility in choosing your income amount.
  2. You can handpick investments to grow your money and generate income.
  3. In the event of your death, the investment value can be paid out as income or in cash to your chosen beneficiaries rather than being lost.

Partner with IFSA to see your living annuity payouts prosper

Whether you’re an IFA with clients interested in investing their living annuity payouts or a private investor looking to bolster your portfolio for retirement, IFSA is ready to assist. Our core team’s more than sixty years of alternative asset experience should see you get the most out of your or your clients’ investments.

Get in touch with IFSA today to discuss living annuity payout investments and beyond. We look forward to helping you experience prosperity in progress.