Email your questions to [email protected] or fax them to 021 488 4119. This feature is sponsored by Old Mutual Wealth.
What rights does my spouse have to my living annuity?
Do I have to obtain the consent of my wife, to whom I am married in community of property, to invest my retirement benefit in a living annuity? Does the living annuity have to be in both our names, or can it be in mine only? If the annuity is in my name only and I predecease my wife, would she still benefit from the annuity? If we get divorced after I have invested the retirement benefit in a living annuity, would she be entitled to any benefits?
Kobus Swart
Janine Player, a financial planner and employee benefits consultant at Old Mutual Private Wealth Management, responds: The decision about where to invest retirement benefits rests entirely with the member, irrespective of how he or she is married, and the consent of the spouse is not required.
The living annuity must be in your name only. However, you may, if you wish, nominate your wife as a beneficiary of the living annuity in the event of your death.
The spouse of a living annuity member is not protected by the Pension Funds Act, so, unless the member specifically nominates his or her spouse as the beneficiary, he or she will not have a claim by virtue of being a dependant. This can have harsh consequences for the surviving spouse, because there may not be other assets in the estate to provide for his or her support.
Only if the spouse is the nominated beneficiary does he or she become entitled to the value. The spouse has a number of options available as to how he or she will receive it, one of them being to transfer the value into his or her own living annuity.
Where the member nominates another beneficiary or beneficiaries, the surviving spouse has no claim to the living annuity, unless the member nominates his or her estate or the beneficiary nomination is invalid, in which case the value defaults to the estate. Where payment is made to the estate, the spouse will have a claim by virtue of their marital property regime.
While the member is alive, the living annuity value neither falls into the spouses’ joint estate nor can a spouse claim a portion of the annuity in terms of the Divorce Act. The assets underpinning the living annuity do not belong to the member, but to the life assurance company, and the member has a right only to a monthly income. The right, as such, cannot be attached in terms of the law as it currently stands. Only once the income is in the member’s bank account can it be attached or considered to form part of the joint estate of the marriage.
If the divorce order includes maintenance payments to be made to the former spouse, the member would have to honour those payments.
Can I take a lump sum from my living annuity?
I took early retirement in 2010 and bought a living annuity after taking about 15 percent as a cash lump sum. My pension drawdown is only 2.5 percent, because I have a business that provides me with an income. Can I withdraw the balance as a lump sum to maximise the tax on my living annuity?
Herman Bezuidenhout
Janine Player responds: You have not provided enough information to enable me to answer your question comprehensively. You should, however, consider the following: if your living annuity has a value above R50 000, you cannot take the full value in cash. You could draw down an income at the maximum rate of 17.5 percent until the annuity is worth less than R50 000. However, remember that your drawdown is included in your taxable income, so you need to consider the tax consequences of increasing your drawdown, particularly if you are earning another income.
Even if you were able to withdraw the full balance as a lump sum, the lump sum would be taxable, whereas it earns tax-free returns if it is left invested in the living annuity.
As a rule, it is preferable to draw down the minimum amount of 2.5 percent and allow the investment to continue to be invested in a tax-exempt manner until you no longer receive an income from your business. Hopefully, by then, the living annuity will have reached a value that will provide you with an income for the rest of your life.
Not only is a living annuity an extremely tax-effective means of earning compound investment growth, but you are also not required to comply with regulation 28 of the Pension Funds Act, so you could, if you wished, invest the full value in equities, or offshore, or in listed property. A further advantage is that the value of a living annuity does not pass into your estate on your death or if you are declared insolvent. So, unless you nominate your estate as the beneficiary on you death or you do not have a valid beneficiary nomination, it is neither subject to estate duty nor can it be attached by your creditors.
I recommend that you seek professional advice before you make any changes to your living annuity, to ensure that your decisions meet your long-term retirement-planning objectives.
Where should my elderly parents invest R3 million?
My parents are 71 and have received R3 million from an investment. They have no other source of income and no debt. They need an income of R25 000 a month. They have been given conflicting advice on how to invest the money. What do you advise?
Mark Frame
Janine Player responds: The impossible-to-answer-question when planning for our retirement is how long will we live. With improvements in health care and lifestyles, 71 is not considered particularly old, and it possible that at least one of your parents will live into their 90s. I advise my clients that, although they may not relish the thought of living into their 90s, they certainly do not want to have run out of money if they do.
The income your parents require amounts to 10 percent of the capital amount, which will make 120 monthly payments before it is depleted. It is clear, therefore, that you parents need to invest the R3 million in a manner that will provide them with solid, long-term capital growth. Your parents also need to take inflation, currently about six percent a year, into account.
Your parents have to accept that there is no “risk-free” investment. Your parents will have to balance their targeted investment return with the amount of volatility they are able to tolerate.
You have not stated whether you parents own any other assets, such as a property, which, at a future date, could be sold if they live longer than they expect. Assuming that they do not own any other assets, I would not recommend a high-growth investment strategy, because the volatility would not be appropriate for investors of their age and profile. I, therefore, recommend the following:
• You have not said in whose name the money is currently held but, if possible, they should each invest half of the value (R1.5 million) in their respective names. This will enable them to take maximum advantage of the annual interest and capital gains tax exemptions and provide some protection for the surviving spouse on the death of the first-dying, because the surviving spouse will continue to have access to the capital and be able to draw a monthly income while the estate of the first-dying is being wound up. There is further added protection for each of them should one of them get into debt and creditors attach his or her assets.
Donations between spouses are exempt from donations tax, unless successfully challenged as a “scheme of tax avoidance” in terms of the Income Tax Act. Splitting assets with the sole purpose of avoiding tax does contravene the Act, so you will have to be able to justify that there are defensible and valid reason for investing the capital in both their names, such as those I have outlined above.
• Each of them invest one-third (R500 000) of their R1.5 million in a money market fund and draw their monthly income from this fund until it is depleted. This will probably take a little longer than three years, accounting for inflation and assuming they earn an average interest rate of six percent a year.
• Each of them invest the balance (R1 million) in a balanced fund unit trust fund that targets an annual average return of inflation plus five percent. This fund will have to start paying them a monthly income once the money market investment has been depleted. However, if the unit trust investment is left to grow for three years, it is highly probable that it will have started to achieve the targeted return by then.
• Your parents should prepare a detailed budget in order to see if there is any way they could reduce their monthly income needs without having to reduce their standard of living substantially.
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