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Can I choose my own living annuity rate?

Reader’s question answered.

Cape Town – In this advice column Rick Briers-Danks from Veritas Wealth answers questions from a reader who wants to know if he can determine his own drawdown rate from his annuity.

Q: I have a Shari’ah compliant living annuity. At the anniversary of the policy I am asked to choose the monthly pension. My understanding is that I can choose between 2.5% and 17.5%.

However my financial adviser at the company says that it is their policy not to accede to more than 8% given the money invested and my age (65 years).

Can the company concerned do that? Surely the risk is all mine as they point out in the small print.

As a living annuity annuitant you are entitled to a drawdown rate of between 2.5% and 17.5% per annum.

In the past, SARS did impose a duty on administrators to ensure that the rate at which an annuity is paid can continue for at least the rest of the expected lifetime of an annuitant. However, the instruction on which this was based has since been replaced by a clause in the Income Tax Act which does not impose a cap on a living annuity other than the one mentioned above (2.5% – 17.5%). It is silent on any obligation placed upon the administrator to ensure the annuity lasts for the member’s lifetime.

Some insurers have however taken the view that they still have an obligation to protect their members’ pensions. And the only way that they can ensure that the income lasts is to cap the drawdown rate.

That said, this is the first time we have heard an insurer actually enforcing a cap. If an insurer does apply such a cap, I would think that such a restriction would have to form form part of the investment agreement between the annuitant and the insurer.

You may find your financial advisor is advising you that a drawdown of over 8% is not sustainable but you still have the ‘right’ to take more than this if you like. The advisers suggestion does seems prudent, but I would encourage you to look at all your assets and not just this living annuity in isolation when calculating an appropriate drawdown rate on your capital.

You need to take a holistic view of your finances as you may have income from different sources or may have discretionary investments that you can drawdown on. That would change how much income you needed from the annuity.

Rick Briers-Danks is a partner at Veritas Wealth Management.

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