What is the difference between a preservation fund and a living annuity?

Question:

I have to decide what to do with my pension fund contributions. What is the difference between a Preservation Fund and a Living Annuity. This Preservation fund Information is exactly what I needed to get informed, can you do the same format for an Living Annuity.

Answer:

The Living Annuity is, in essence, an investment product. It transfers the risk and responsibility of securing an adequate income for life onto your shoulders. In return, you have greater investment and income flexibility and your heirs inherit whatever is left of your capital after your death (i.e. your capital does not die with you).

With a Living Annuity, you decide how to invest your savings, within the basket of investments offered by your product provider. Unless you have the necessary investment expertise, you should consult a reputable retirement planning tool or financial advisor on the appropriate draw-down rate and asset allocation. Every year you must draw a pension from your investment. This so-called draw-down must be at least 2.5% but no more than 17.5% of the annual value of the residual capital at the policy anniversary date. Your draw-down rate can change from year-to-year, but you must make your election before the policy anniversary date. You can choose to receive your income monthly, quarterly, semi-annually or annually.

You can switch product providers, but you should do so only for sound reasons, such as an increase in costs, poor service or inappropriate investment choices. You are not bound to one annuity. Provided that one annuity has a minimum income flow of at least R150 000 per year, you can purchase up to four annuities with the proceeds from your pension fund. You can switch a Living Annuity into a Guaranteed Annuity at a later stage (although you cannot do the reverse). You can take out both types of annuities concurrently or purchase a composite annuity (both living and guaranteed) under a single life assurance policy. Your nominated beneficiaries inherit any residual capital after your death; they can choose to receive a lump sum, an ongoing annuity or an accelerated annuity (paying out over five years).

If you do not nominate any beneficiaries, the money will fall into your deceased estate and be subject to your testamentary wishes. Your Living Annuity is not subject to Estate Duty. Any residual capital is taxed either per the lump sum or the income tax table (depending on whether beneficiaries choose to receive a lump sum or annuity income). Please refer to our living annuity section for more information.