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The pros and cons of voluntary annuities

A Fin24 user wants to know more about the advantages and disadvantages of voluntary annuities. He writes:

What are the pros, cons and tax implications of voluntary annuities - in other words not retirement annuities (RAs), guaranteed or living annuities?

Tristan Naidoo, legal manager at Old Mutual, responds:

Living annuity

This type of annuity is structured in a way whereby the pensioner receives his or her annuity by way of amounts withdrawn from the capital invested.

The amount that can be withdrawn is limited and is restricted to a rate chosen by the pension that cannot fall outside the range of between 2.5% and 17.5% of the investment capital per year and can be changed once a year on the anniversary date of the annuity.

Although the income is usually drawn in monthly payments, other options do exist.
 
Advantages

Unlike with a life annuity, you have the option to change your income stream every year and if you no longer like the living annuity, you can use the proceeds to invest in a life annuity.

When you die, the remaining portion of the annuity can go to anybody you nominate and, failing a nomination, will go to your estate.
 
Disadvantages

With this type of annuity, the pensioner carries all the risk and you may run the risk of depleting your capital before you die.

Factors which could contribute to you running out of your capital include, a decline in the market - which means that your investment value will not experience any real growth - withdrawing too high of an annuity or living longer than expected.

Since this annuity does not come with any guarantees, you should plan carefully if you choose this option.

Conventional (guaranteed) annuity
 
With this type of annuity, an insurance company takes on the risk of how long you will live and will then, in return for a capital amount, pay you a monthly income for as long as you live.

If you live longer than the insurer expected, the insurer will suffer a loss, but, if you live shorter than expected, they will make a profit.

There are various types of conventional annuities, which all will affect the value of the annuity that you will receive.

You should consult with an accredited financial adviser with a reputable institution to have these different options explained to you in detail.

Advantages

As mentioned above, no matter how long you live for, the annuity will pay out for the rest of your life.

One can also have guarantees added to the annuity to ensure that the annuity will pay out for a guaranteed period, irrespective of the when the pensioner dies.

Disadvantages

Since the capital is paid over to the insurer in return for a lifetime annuity, there is no capital remaining after the death of the pensioner that can be left for anybody else.

Therefore, if the pension does not elect for any guarantees, a considerable amount of capital will essentially be lost if the pensioner does not live for a long time after retirement.

Furthermore, if an annuity that does not counter inflation is selected and the pensioner lives for a long time, the annuity may not provide the pensioner with a sufficient income.

It is imperative that one consults with an accredited financial adviser with a reputable financial services provider to ensure that the best option is selected for your particular set of circumstances.

- Fin24

Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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