The living annuity is attractive because it offers flexibility, but if that flexibility is used without the necessary care, it becomes a disadvantage.
Many people choose the living annuity because they want to leave capital to their children at their death, and they don’t like that life annuities do not pay capital at death. But then they end up using their living annuity capital up too soon and instead of leaving them an inheritance, they become a burden to their children.
Who should consider investing in a living annuity?
Here are some situations where a living annuity may be a suitable choice:
- If you can draw 4% or less annually of your retirement savings and have enough income to live on, then consider a living annuity.
- If you are comfortable with some investment risk and happy working with a financial advisor to decide on investment allocations and income changes, a living annuity may suit you.
- If you are in a situation like early retirement or retrenchment, where you must decide how to invest your retirement funds immediately, but you expect that your income needs might change then consider a living annuity.
- If you have a serious illness, and there is the likelihood of some years having much higher expenses, or a high probability you might die at a younger age than average, a living annuity may suit you.
- If you have emigrated you can use the maximum draw of 17.5% to “drain” the fund over a few years. When the balance goes under R125000 (As at 2024 tax year), you can take the balance as a lump sum.
In conclusion
Living annuities offer flexibility, control, and a legacy, but getting the full benefit of this investment option requires consistent and level-headed management; it’s not something you can sign-and-forget. If you choose this option, you should make sure to partner with a financial advisor who has a disciplined approach to providing ongoing advice and support.