Question:
My wife has a retirement annuity (RA) which is maturing. She has the option of activating the RA to commence paying an annuity. She does not currently require an income and is far from the threshold for income tax.

Should she invest the full accumulated amount in a selected portfolio of unit trusts or take the one third lump sum payout now and invest the balance with a payout at 2.5 percent?

Her investment is unlikely to soon reach the tax-free level of R300 000 on the payout.

What would the best option be?

Answer:
Maturity dates have the undeniable way of making investors believe that it?s time to ship out. Although one has the option of transferring, it's not the only option and alternatives should be considered.

One has to bear in mind that by and large the setting of a maturity date (especially when it comes to traditional RA policies) was to establish the term upon which commission was paid ? the longer the term, the higher the commission. This was generally 'capped' at a maximum of a 25 year term or upon attaining the age of 55, whichever comes first.

This being the case, what are the options available to a policy owner upon maturity? Well, in essence, there are three:

• Leave it exactly where it is (with the further choice of additional contributions or not).

• Transfer via a Section 14 to another retirement annuity provider (with the further choice of additional contributions or not).

• Transfer to a conventional life annuity or Individual Linked Living Annuity (ILLA) (Click on the following links for more information).

  • Benefitting from a living annuity

  • Living annuity Q&A

  • Retiring soon?

For the first two options, the general scenario would be the same. By remaining in an RA one gets the benefit of not having to drawdown any form of income which, in this instance, is not needed.

As far as possible, one should opt for no further premium paying term being imposed and therefore become free of being committed to a later maturity date (referred to as 'as-and-when'). This gives one the freedom of stopping or reducing premiums at any time without any penalties as well as the option to mature at any future date.

Of course, as highlighted under the second option, one may also transfer to a different company and continue from there. Although this has certain benefits, one should be mindful of the reasons for this move. If it is merely about fund choice or asset manager preference, be sure to find out whether that could be implemented on one?s current policy with the existing provider. Generally the main reasons for transfer would be for more favourable fee structures as well as if a company has a particular value proposition and/or investment philosophy that better suits your needs.

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