Discretionary funds cannot be used to purchase a living annuity, but there are other options.
Q: I’m 36 years old and would to know if it is possible for someone my age to invest in a living annuity?
I lost my job in April 2021 and have a lump sum of R5 million to invest in a living annuity or any other income-generating investment vehicle. I’m planning to enrol full-time in university in 2023, so I will need a monthly income. It is my view that I don’t need to sit with this kind of money in my savings account and withdraw monthly from it but rather invest it in something like a living annuity.
I do have a retirement annuity and I’m planning to continue contributing but I need income-generating vehicles like a living annuity or something.
A: Thank you for your question. We are sorry to hear about you losing your job during these uncertain times. Sadly, this is a reality that many people currently face.
In answering your question, we have assumed that the R5 million lump sum is currently being held in cash or in a discretionary investment or bank account. If this is the case, the short answer to your question is that you are not able to use these funds to purchase a living annuity. This is because, in terms of the Pension Funds Act, only funds that are housed in an approved retirement fund such as pension, provident, preservation and retirement annuity funds can be used to purchase a living annuity.
Discretionary funds, such as those held in a savings account, can therefore not be used to purchase a living annuity as this type of vehicle is reserved solely for the investment of retirement benefits regulated by the act. As such, you will need to consider a suitable discretionary investment vehicle for these funds depending on your needs and objectives, and we will get to this below.
Let’s have a look at your current circumstances as we understand them from your question. You intend to study full-time from 2023 and will therefore need to draw an income from your capital for the duration of your studies. We have assumed therefore that you will not be generating a taxable income during this period. You also mentioned that you have a retirement annuity (RA) in place and that you would like to continue contributing towards it while you study. However, keep in mind that as you will not be earning a taxable income, there will be no tax incentive for investing in a retirement annuity.
Assuming that your RA is on a linked investment service provider (Lisp) platform, you may want to consider putting your RA contributions on hold while you are studying, keeping in mind that there will be no penalties for stopping your contributions. You can always restart your contributions once you start earning again. If your RA is insurance-based, however, you will need to find out whether there are any penalties for putting your contributions on hold.
Now let’s focus on your lump sum of R5 million which we’ve mentioned will need to be invested in some form of discretionary investment vehicle.
Incidentally, you are permitted to have a regular withdrawal from a unit trust investment but bear in mind the tax implications – capital gains tax (CGT) and tax on interest earned – and the applicable tax exemptions (CGT annual exemption and interest income exemption).
As a full-time student, you will need to use some of these funds to cover your tuition fees, accommodation, textbooks, groceries, transport and all other living expenses over the next three to four years, while it is likely that you would want to invest the balance of the funds for the longer term so as to achieve investment growth.
The first step, therefore, would be to prepare a realistic budget for the duration of your studies so that you can quantify how much of your lump sum would need to be invested for the short term (a three-to-four year period), as you will likely want to ensure that these funds are housed in a low-risk portfolio and are not exposed to market volatility, with the aim being capital protection.
Assuming that you intend to find employment after your studies, the balance of the funds could be invested for retirement or for longer-term goals and, given that you are only 36 years old, your investment timeline would allow you to place these funds in growth assets such as equities and property so as to achieve more favourable investment returns over time.
Our advice is to find an independent, fee-based advisor who can help you select appropriate investment strategies for your funds so that you can optimally achieve both your short-term and longer-term goals. Keep in mind that there are tax implications when investing on a Lisp platform and it is important that these are fully understood at the outset, but your advisor should be able to guide you accordingly.
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Source: (Moneyweb, 2022)
