Welcome to our July 2023 edition of FC Viewpoint. We have reached the half-year mark and what an eventful first half it’s been!

IN THE NEWS:

• The JSE All Share Index closed on 74 346 on Monday 10 July 2023. This is 2.5% lower than the 76 282 on 13 June 2023.
• 1 US Dollar will cost you R18.71; 1 Pound = R24.14 and 1 Euro = R20.62.
• Annual consumer price Inflation is 6.3%.
• The prime lending rate in SA is 11.75% per annum.
• The price of Oil is $77 per barrel.
• View from Ninety One on the second half of 2023: “As we look forward to the 2nd half of 2023, we continue to expect a volatile market landscape, but for active managers, this will present opportunities especially as the interest rate hiking cycle nears the end.”

Upon retirement, legislation stipulates that at least two-thirds of the net proceeds from your pension, provident, or retirement annuity fund must be used to purchase a life annuity, a living annuity, or a combination of the two. Now, the question you might be asking is: of these annuities, which one is best?

The answer to this question depends on several individualistic factors and most importantly, the answer lies in your understanding of how these two products works. A life annuity is also known as a Fixed Annuity or Guaranteed Annuity.

Life Annuity / Fixed Annuity

A life annuity is an insurance product that provides a guaranteed income stream for the rest of your life, no matter how long you live. The amount of the payments is determined by a variety of factors, including your age, gender, guaranteed period, and the amount of money you give to the insurance company. With a life annuity, you are essentially transferring the risk of outliving your savings to the insurance company or the market risks associated with the investment. The promised monthly payments are subject to income tax according to the standing Sars tax tables.

This product allows you a guaranteed option for a specific period of time, which could be 10 years, 15 years, or 20 years. With this guaranteed option, you can nominate beneficiaries, who in turn will receive the promised monthly payments until the stated period lapses upon your passing.

For instance, if you decide to buy a fixed annuity product with a 10-year guarantee period, and for some reason you pass in year two, leaving behind eight years, your beneficiaries will receive the promised payments up until the eight years have lapsed.

Living annuity

A living annuity, on the other hand, is a retirement income product that allows you to withdraw money from your retirement savings while your money remains invested in a portfolio of assets that are not subjected to the demands of Regulation 28 of the Pension Fund Act. An annuitant has a choice to withdraw from this product anything between 2.50% and 17.50% annually, semi-annually, quarterly, or monthly. Income adjustments are made per the given anniversary date of the policy depending on changes in circumstances. In the same vein as the fixed annuity, the amount drawn is subject to income tax based on Sars tax tables.

With a living annuity, you are responsible for managing the investments in your portfolio with the help of your financial advisor, and the amount of income you receive depends on the performance of the underlying funds. The beauty of this product is that it allows you to have control and flexibility over how your money is invested. Another notable advantage of a living annuity is that it does not form part of your estate, thus allowing your nominated beneficiaries immediate access to the residual value of your funds upon your passing. The beneficiaries can withdraw the residual value in full, as an annuity, or as a combination of a cash lump sum and periodic annuities.

However, unlike a life annuity, the income from a living annuity is not guaranteed for life. If your drawdown rate is too high, you risk depleting your capital, thus potentially exposing yourself to longevity risk.

…a life annuity provides a guaranteed income for life, while a living annuity allows you to manage your own investments…

Conclusion

In summary, the main difference between a life annuity and a living annuity is that a life annuity provides a guaranteed income for life, while a living annuity allows you to manage your own investments and gives you more flexibility, but without a guaranteed income for life.

You are welcome to consult with us, who will guide you in shaping and framing your portfolio according to your goals and willingness to take risks.

Wealth regards,

Fanie Jansen Van Vuuren CA (SA), CFP®

Director: FC Wealth and Investments (Pty) Ltd

E: [email protected]  |  T: 083 384 5868

W: www.fcfin.co.za