HOW TO BEQUEATH MY LIVING ANNUITY
Assume I have a substantial living annuity and two daughters – let’s call them Amanda and Christine – who are over 30 years old. I do not have a surviving spouse, and I want each of them to have half the income from my living annuity after my death. Amanda is not able to manage her financial affairs, so I want to name her trust as one of the beneficiaries, with half the funds providing an income for the rest of Amanda’s life, and Christine as the second beneficiary with the remaining half. Is this possible?
Will Amanda’s portion be classified as part of my estate and attract estate duty?
Will I have to submit a copy of the trust deed to the linked-investment services provider to satisfy it that the trust is for the benefit of a natural person?
If acceptable, will the proceeds be paid directly to both beneficiaries, instead of the trust portion being paid into my estate?
Can you suggest any other way of passing on a portion of a living annuity to a financially incompetent beneficiary without paying capital gains tax, estate duty or pre-retirement tax if Amanda’s 50 percent is paid into my estate as a lump sum, in order for my estate to pass the benefit on to Amanda as an income for life?
Name withheld on request
Riaan Strydom, a financial adviser at PSG Wealth in Mill Park in Port Elizabeth, responds: If a beneficiary is nominated, a living annuity is excluded from your estate for the purposes of calculating executor’s fees and estate duty. Your living annuity will be allocated to your nominated beneficiaries in the proportions reflected on beneficiary nomination form.
Unfortunately, you cannot dictate the option the beneficiary may exercise insofar as payment of the benefit is concerned. If you nominate Amanda as a beneficiary, she will be able to withdraw her entire benefit as a cash lump sum and squander the after-tax amount.
Alternatively, you can nominate a trust, of which Amanda is a beneficiary, as the beneficiary of your living annuity. A trust itself may not own a living annuity, so any benefit payable to the trust in terms of a beneficiary nomination form will, under normal circumstances, be paid out to the trust as a lump sum and taxed. However, some product providers allow the trustees of such a trust immediately to vest the rights to the living annuity in a natural person beneficiary of the trust. This beneficiary can then transfer the benefit to a separate living annuity or guaranteed life annuity without having to pay tax on the benefit.
If this is the case, the trustees could attach any condition they deem fit to such a vesting of rights. They could, for example, determine that the benefit from your living annuity can be invested in Amanda’s name only if she uses the entire benefit to buy a guaranteed compulsory life annuity. If she does not accept the conditions, the trustees have the right to receive the full benefit as a lump sum, and to have it taxed and invested in the trust.
It is clear that your main concern is Amanda’s protection. Considering her age and life expectancy, my recommendation is to nominate the trust as the beneficiary and amend the trust deed if possible. The amendment should reflect the terms under which a living annuity benefit can be vested in the hands of the beneficiary and it can nominate the specific beneficiary. One of the terms could be that she purchases a guaranteed life annuity with an annual income escalation. This is the best way of protecting her income for life.
WHAT TO DO WITH R500 A MONTH
I am 55 years old and seven years away from retirement. I am in a low- to middle-income bracket. I owe R200 000 on my home loan, but have no other debt.
I have about R1.4 million in my occupational retirement fund, which will pay out when I am 63, but I have no other savings. I have R500 to spare each month. Should I use it to pay off my home loan faster, or should I take out a retirement annuity (RA)? What is the best way to use the R500 over the next seven years?
Name withheld on request
Tommy Ferreira, a financial adviser at PSG Wealth in Northcliff, Johannesburg, responds: You have three options:
1. Increase your contributions to your retirement fund by R500 a month;
2. Invest R500 a month in an RA; or
3. Increase your home loan payments to repay your loan faster.
The first and second options will increase your retirement savings and move you closer to your savings goal. An increase in your pension fund contribution will be administered by your employer and will be deducted from your salary. An RA will be funded by your after-tax income.
However, if I understand your circumstances correctly, the third option would be the best. It is prudent to make paying off debt your first priority, particularly when interest rates are rising. If you can, you should recalculate your home loan repayment term to seven years to ensure that you will be debt-free when you reach retirement. Debt can be a drag on your income in retirement and should be avoided.
ARE INVESTMENT FEES DEDUCTIBLE?
When one invests in a property to rent, all the expenses are tax-deductible – for example, levies, rates, managing agent fees and cost of repairs. Why is it that when one invests with a financial institution, the management fees/expenses are not tax-deductible?
Peter Stephan, the senior policy adviser at the Association for Savings Investment SA, responds: For an expense to be tax-deductible, it needs to meet the general deductions provisions of section 11(a), read with section 23(g), of the Income Tax Act. One of the provisions is that it must be expenditure incurred in the production of trade income as defined in the Act. This would include renting out a property, but it excludes an individual making an investment, unless you are doing it as part of your occupation.
Section 23(g) states that money must be expended for the purpose of trade, and is deductible only to the extent that this is so. Trade requires some sort of active occupation rather than the passive earning of investment income.
TRANSFERRING MONEY OFFSHORE
I read with interest the response from Marius Cornelissen to Peter Rodgers’s question [on transferring funds offshore] in Personal Finance (“Advice for a sojourn abroad”, September 13) . Please clarify two points:
1. To use the R1 million allowance, do you have to be in South Africa, or can you do so from overseas?
2. Is it necessary to define “overseas temporarily”? How long is “temporary”?
Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: South African residents who want to move abroad temporarily are entitled to the discretionary allowance of R1million in the calendar year of departure. You can obtain the allowance from inside or outside South Africa, but it must be in the calendar year of departure.
The South African Reserve Bank’s exchange control manual defines a “resident temporarily abroad” as any resident who has left the Republic for any country outside the Common Monetary Area, with no intention of taking up permanent residence in that country, but excluding those residents who are abroad on holiday or business travel.
The time spent abroad is not at issue; the definition hinges on whether or not you intend to return to your permanent place of abode.
PRESERVATION FUNDS AND EMIGRATION
In response to a query about a withdrawal from a preservation fund on emigration (“Access to a preservation fund”, Personal Finance, July 12) Old Mutual said: “In 2012, the [Income Tax] Act was amended so that a member who withdraws a portion of his or her pension benefit before the transfer to the preservation fund will be entitled to a further withdrawal at a later stage. This means that your son is now allowed to make a full or partial withdrawal from the preservation fund.”
I thought that the withdrawal on emigration had to be done before age 55. If not, the funds cannot be taken and must be used to buy an annuity. Is this correct?
Name withheld on request
Shreekanth Sing, legal adviser at PSG Wealth, responds: Fifty-five is the minimum retirement age. A member is not forced to retire at 55 and is entitled to a once-off withdrawal any time before retirement.
If a member has taken his once-off, pre-retirement withdrawal, the member may have access to his or her benefits again only upon retirement.
Only retirement annuities (RAs) are allowed to be accessed upon emigration.
If a member has already taken the once-off pre-retirement withdrawal and is emigrating, the solution is to transfer the preservation fund benefit to an RA via a section 14 transfer, consolidating all retirement benefits into one vehicle that is accessible on emigration.
Note: Personal Finance welcomes general questions, but if you require specific financial advice, please consult an adviser. Letters and responses may be edited.