Investment-linked living annuities (illas) are to be renamed retirement income drawdown accounts (riddas) as part of a general overhaul of the product.
Currently, illas can be sold only under a life assurance licence. They are widely marketed by linked-investment services provider companies, which are owned by life assurers, or have obtained a life assurance licence, or in effect rent a licence to enable them to sell illas.
The government says there are a number of reasons that more institutions should be allowed to sell illas (riddas). The reasons include:
Costs
The government is concerned about the costs of illas, which can be more than five percent of the invested value of the annuity, once adviser fees, administration platform fees and asset management costs have been factored in.
The government believes that more competition can lower the costs. It has proposed that retirement funds, collective investment schemes (unit trust management companies and providers of exchange traded funds) and banks be allowed to market riddas. In fact, the government itself intends to enter the ridda market with a product linked to its successful RSA Retail Bond.
In its explanatory memorandum to the Taxation Laws Amendment Bill, the government says: “Because living annuities can seemingly be offered only by insurers (outside of retirement funds), it is contended that many problems associated with these products can be solved through increased competition beyond a narrow group of insurance providers.”
* Structure. The government says in its memorandum: “On a technical level, living annuities, as defined in the Income Tax Act, are not true annuities. The drawdown levels can be altered annually, so the payment is not permanently fixed into a narrow framework.
“More importantly, living annuities do not really operate as insurance products, because the risk does not pass to the insurer but remains solely with the recipient retiree.
“Payments for life are not guaranteed and, once the capital savings are depleted, the annuity ends.”
The government says that one of the effects of opening up the living annuity market is that there will be an increase in the migration of living annuities to low-cost product providers.
The government says it is a fact that pensioners who receive an illa income from more than one provider or a fragmented income from the same provider often require their living annuities to be combined into one contract.
The government wants to encourage the combining of living annuities, because it will be cost-effective and it is less likely to result in the capital value of the assets falling below an effective R75 000, resulting in a commutation to cash.
Drawdowns
The minimum annual drawdown of 2.5 percent will be scrapped, “because a minimum drawdown is more consistent with a (guaranteed) annuity product”.
The drawdown account for a ridda must meet the following conditions:
* The total value of the drawdown must be linked to the value of the assets or the retirement savings used to purchase the annuity;
* The provider cannot guarantee the amount of the annuity;
* No more than 17.5 percent of the remaining balance can be withdrawn in any one year, except where the total value of the assets or savings falls to R75 000 or less, in which case the total amount may be withdrawn as a lump sum; and
* When the recipient dies, the remaining savings may be withdrawn by his or her nominee as a lump sum or the nominee can continue to receive an income on the same basis.
The National Treasury says existing legislation, which is not clear on this point, will be clarified to allow a nominee to decide whether to take the benefit as a lump sum or an income or as a combination of both.
“The law will be also be clarified to ensure that any residue can only be bequeathed to a natural person and not to some other legal entity, such as a trust or a company.”
WHAT IS A LIVING ANNUITY?
An investment-linked living annuity (illa) is one of two broad pension choices you have when, at retirement, you must buy a pension with the benefits paid out from a tax-incentivised retirement savings vehicle.
The other pension choice is a guaranteed annuity.
The main difference between the two is that with a guaranteed annuity a life assurance company takes the risk of having to pay you a pension for the rest of your life, whereas with an illa you take the risk that your pension will last. The risk is yours because each year you must decide how much (subject to certain limits) to draw down as a pension and because you are responsible for how your capital is invested.
The illa drawdown limits are between 2.5 percent and 17.5 percent of the residual annual value of your savings. Once the total value of the assets or savings falls to R75 000 or less, you may withdraw the entire amount as a lump sum.
When you die, a nominated beneficiary may withdraw the remaining savings as a lump sum or continue to receive an annuity.