Email your questions to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.
Can an ex-spouse receive an income from a living annuity?
When the owner of a living annuity dies, can his or her former spouse receive an income from the annuity?
Rudi Rust
Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: The Divorce Act states that a person’s pension interest is deemed to be part of his or her assets, which can be awarded to another person (assigned).
A pension interest is defined in the Divorce Act and the Pension Funds Act, and applies to pension, provident, retirement annuity and preservation funds. A living annuity is a post-retirement product that allows you to re-invest the proceeds of these funds to receive an income. In most cases, the income is referred to as a pension, but the living annuity does not form part of the pension interest and therefore cannot be divided in accordance with a divorce order.
It is, however, possible for the former spouse of the owner of a living annuity to initiate a maintenance claim against the annuitant. The maintenance order will be made against the annuitant, because the pension income is paid into his or her bank account, and the former spouses can then divide the income according to the maintenance order.
One of the features of a living annuity is that the owner can nominate beneficiaries. It is important to take note of the beneficiary nomination associated with the living annuity, because this will determine how the investment is divided at the owner’s death.
The beneficiaries can transfer their share of the investment into an annuity that will provide a regular income, or take some or all of the investment as a cash lump sum. If the investment is taken as a cash lump sum, it may be subject to tax.
If the living annuitant’s former spouse was the nominated beneficiary, he or she can transfer the living annuity into another living annuity, from where he or she will be able to receive a regular income.
Trust income and old-age grants
Can someone who receives income from a trust qualify for a social old-age grant?
Avinash Sewlal
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: The South African Social Security Agency (Sassa) uses a means test to determine whether an applicant qualifies for a grant. Sassa evaluates the applicant’s income and assets to determine whether the person’s means are below a stipulated amount. All assets and income payments are taken into account, as well as certain expenses, such as medical expenses. A distribution from a trust could affect an applicant’s assets and income, depending on the size and frequency of the distribution.
What happens to life assurance premiums when policyholder dies?
A family member who paid the premiums on my life assurance policy for about 15 years recently passed away. He was the sole beneficiary. What happens to the premiums that have been paid?
Name withheld
Braam Fouche, a financial adviser at PSG Wealth in Umhlanga Rocks, Durban, responds: The life assurance industry offers various forms of life cover, and the conditions attached to each agreement can differ significantly. The general trend is for policies to lapse within three months if no premiums are received. If this is the case, the life assured will have to re-apply for life cover, not necessarily with the same company.
Historically, life policies included a savings component, which meant that a portion of the premiums were saved; the entire premium was not used to fund the life cover. It seems that the person who paid the premiums was also the owner of the policy. Therefore, the executor of the deceased’s estate could withdraw the savings and add them to the estate. If the contract provided for the savings to fund any outstanding life cover premiums, the life cover would have remained in effect. In this case, the executor, in consultation with the heirs, should decide whether this should continue or the savings should be paid to the estate.
However, the current trend is for life policies not to have a savings component. In this case, all the premiums are forfeited if the policy lapses.
Do I have enough for retirement?
I am 56 years old, healthy and have a reasonable job, and I presume I can work for the next 10 years. I have a home, which is worth about R2.5 million, with a relatively small mortgage bond. Apart from an annuity worth about R300 000, I have no other savings. My youngest child is almost independent, and in a couple of months I will be able to save R10 000 a month. This amount can increase to R20 000 in the next 18 months. How should I invest this money and how much trouble am I in?
Sue
Wico Strydom, a financial adviser at PSG Wealth in Silverlakes, Pretoria, responds: How much trouble you’re in all depends on your income needs at retirement.
Let us assume the following:
• An inflation rate of six percent a year;
• Investment growth of 10 percent a year (four percent above inflation);
• A contribution of R10 000 a month for the first year; and
• A contribution of R20 000 a month for the next nine years.
Based on the above assumptions, it is expected the R300 000, together with the monthly contributions,will be worth R4 914 000 in 10 years’ time (adjusted for inflation; that is, R2 744 000 in today’s terms). Assuming a withdrawal rate of five percent a year, you will be able to receive a monthly income of R20 475 (adjusted for inflation; that is, R11 433 in today’s terms).
With an investment horizon of 10 years, you should invest the R300 000 and the monthly contributions in asset classes that will grow your capital.
Will ‘junk status’ affect my RA value?
The current value of my retirement annuity (RA) is R200 557, and the benefit will have a value of R383 494 on September 1, 2020, which is my retirement date. If South Africa’s sovereign debt is downgraded to “junk status”, will the value of the retirement benefit plunge?
Louella Bidgood
Tommy Ferreira, a financial adviser at PSG Wealth, Northcliff in Johannesburg, responds: The projected value of your retirement investment is for illustrative purposes and can be influenced by various factors, one being the possible downgrade of South Africa’s investment status. The portfolio construction of your RA is important and will determine the potential growth of the investment. It is possible that the market has already priced in the downgrade, but, in saying that, you still have four years for the investment to recover and grow. Other factors, such as the global slowdown in growth and low market returns, will also have a significant impact on the value of your investment.
My advice is that you ask an adviser with the Certified Financial Planner accreditation to analyse your RA and the underlying investments.
Can I take a cash withdrawal from a matured RA?
My retirement annuity (RA) matured last month. The value is about R180 000. I will turn 56 in September. I want to withdraw R30 000 from the policy and invest the balance where the RA rules will allow me.
I do not need a monthly income now, because I am working. I have a company pension. I plan to retire in about seven years, when I want to receive a monthly income from the proceeds of the RA.
Name withheld
Pierre Puren, a financial adviser at PSG Wealth in Jeffreys Bay, responds: The threshold at which, on retirement, retirement fund members can take their entire benefit as a cash lump sum increased from R75 000 to R247 500 on March 1. Members of all retirement funds, including RA funds, whose benefits are less than R247 500 do not have to buy an annuity when they retire from these funds. Therefore, you can withdraw the full proceeds from your RA and invest the balance in any investment vehicle.
You do not have to retire from the fund when the contractual term of the RA ends. If your finances allow, you may remain invested in the RA and continue to make contributions (subject to the policy terms).
You could also consider transferring the RA to a different administrator via what is known as a section 14 transfer, at no cost. A transfer would be advisable only if the new RA provides greater transparency and flexibility and a wider choice of underlying investments. A qualified financial planner can help you to compare products so that you make an informed decision.
Note: Letters and responses will be edited for length and clarity.