New draw limit will help you manage retirement cash
The Weekender / Business Day, March 2007

LIVING annuities are purchased with the proceeds of your retirement fund (pension or provident fund) or maturing retirement annuity. The purpose of a living annuity is to provide an income for life.

It’s up to you, as the investor, to determine the amount you would like to draw from the capital.

Up until recently, your draw had to be within the prescribed limits of between 5% and 20%.

From March 1, the South African Revenue Service (SARS) revised these limits to between 2,5% and 17, 5 %.

One of the reasons SARS did this is that investors are drawing on the underlying portfolios of their living annuities too quickly.

Investors are then left short of income in the later years of their retirement. (New research indicates that young adults can expect a retirement phase of up to 11 000 days - which may be the longest phase in an adult’s life).

If you have an existing living annuity that was concluded before March 1, it will not be affected by the rate adjustments.

However, with effect from March 1, you may adjust your living annuity’s draw limits to the new levels. These adjustments may be effected before the next anniversary date of the contract. You may again adjust the draw rates on the following anniversary date of the contract. New living annuities will be subject to the revised limits.

The new limits have significant implications for your financial planning and it’s important for you to consult your financial planner to adjust your financial plan accordingly. The investment returns within the living annuity vehicle itself are tax-exempt, but the amount drawn is included in your taxable income each year.

If you decide in consultation with your financial planner to revise these rates downwards - coupled with the revised tax rates applicable to individuals – you may be able to structure your affairs so that you won’t be liable for any income tax.

As mentioned in a previous column, pensioners over 65 with an appropriately structured financial plan may now earn approximately R200 000 a couple and pay no tax (taking exempt capital gains into account).

You should consult your financial planner to restructure your draw between the different savings vehicles.

It may be tax-efficient for you to adjust your draw from your living annuity downwards and increase the draw from your unit trust or endowment.

If you don’t really require the income from your living annuity (for example, I have many clients who do consulting or part-time work in their retirement), you were previously forced to draw at least 5%. Now you have to draw only 2,5%.

It’s important that the nominal growth in the portfolio of a living annuity should exceed the annual draw. If the growth in your underlying portfolio does not at least match the withdrawals, there will be a rapid decline in the real level of income you receive over time.

Bearing this in mind, perhaps you should adjust your draw rate downwards.

Many asset managers have warned that the stellar performance of the JSE over the past two to three years will not be repeated over the next 12 months.

You may choose to place the living annuity either with an assurance company or with a linked investment product company. It is thus possible to access the identical funds within a living annuity and a unit trust.

It is also important to remember that your living annuity is not a passive investment. It takes both time and expertise to manage and should be monitored continually by your financial planner.

Remember that switches are allowed and it is even possible to transfer your living annuity from one administrator to another.

My advice to you is to engage your own independent, fee-based, certified financial planner who is focused on your best interests, and who can provide impartial advice.

If you do not have a certified financial planner, visit the website of the Financial Planning Institute on www.fpi.co.za to select one.

Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was financial planner of the year in 2001.