Question:
Living Annuity or Unit Trust for income For someone at retirement age with R4 Million in discretionary investments, are there any advantages to purchasing a retirement annuity (even though they would not get the tax benefit) then buy a Living Annuity? One that I can think of, is that the remainder of the living annuity does not form part of the estate. The alternative is to put the funds in a 10X unit trust with Regular Withdrawals to provide an income. The unit trust would give them greater flexibility to restructure the funds, should they so require.
Answer:
Riaan, There is no definitive answer to this question. Your point on the living annuity being wholly exempt from estate duty is actually no longer true - Treasury has closed this loophole: if the contribution was not claimed for tax, then it is now subject to estate duty if the retirement annuity or living annuity holder passes away. There are some benefits from transferring the discretionary money into a living annuity.
Firstly, there is tax-free investment growth, especially people who draw down at moderate rates can benefit from this if their average tax rate falls below the tax rate imposed on dividends (15%) interest (marginal tax rate beyond the first R23 400) and CGT (one third taxed at marginal tax rate beyond the first R30 000). Also, the contributions not claimed are returned first, so that the holder may go for several years without paying tax (although it must be claimed back from SARS - the living annuity provider cannot stop deducting the tax). So if you say, invest R10m into a living annuity, and drew R1m every year, then you would not pay any tax for 10 years, while your investments would grow tax-free for that entire period.
Secondly, the money is protected from creditor claims (and direct spousal claims on the capital in the event of a divorce). Thirdly, the money is managed professionally. This may not be so relevant if the the alternative to the 10X LA is the 10X UT, but if the saver is managing their own money, choosing their own unit trust and asset allocation, and paying high fees, then the outcome may not be optimal. But there are also draw-backs in going the living annuity route, in terms of reduced flexibility (how much money can be accessed every year), the ability to take this money offshore (once the money is in a SA living annuity the capital can no longer be transferred overseas) and potentially paying high income tax rates on the investment income.
Personally, this writer would not transfer discretionary savings into a living annuity due to the loss in access/flexibility, but a living annuity may well serve the needs of others who place less value on this.
