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   Investment Linked Life Annuity (ILLA)

ILLA | Investment Linked Living Annuity option at retirement

Investment Linked Living Annuity option at retirement

Guaranteed Annuity Investment Linked Life Annuity (ILLA)  Example of different Annuity options An Investment Linked Life Annuity (ILLA) enables you to transfer your retirement fund benefits into a personalised investment portfolio, managed according to your risk profile.

Why invest in an ILLA?

A regular income from a flexible retirement investment product: You can vary your income level and the frequency at which you receive your income each year, thus enabling you to match your cash flow to changing needs. Control of your underlying investment, tailored to your specific risk profile: You can choose from a range of more than 900 funds managed by leading asset managers. Select appropiate funds to tailor your investment choices to meet your own individual risk profile and needs. An experienced and qualified stockbroker can manage your portfolio on your behalf. To leave a legacy to your dependants if you die: At death, the money available in the living annuity is not forfeited but can be transferred to the policyholder's nominated beneficiaries. The beneficiaries may continue with the income payments or receive a once-off payment. A tax-efficient retirement solution: No tax is payable on your investment returns and capital gains. You only pay tax when you receive the income.

Considerations when investing in an Investment-Linked Living Annuity

The main factors that influence the income of an investment-Linked Living Annuity (ILLA) are: The income level selected, together with current and future rates of inflation; The performance of the selected underlying investments, which depends partly on the asset allocation; and The lifespan of the annuitant (how long you live for - if you live longer than the initial estimate, this exposes you to longevity risk).

Effects of income level and investment return on sustainability

The Association for Savings and Investments SA (ASISA) has provided a table that serves as a guide to the sustainability of a specific level of income, for a given level of investment return in the portfolio after fees are deducted. However markets and circumstances change and it is therefore vital that you, together with an intermediary, review your income withdrawal percentages on an annual basis. The table below shows the number of years it will take before your income starts to reduce given a spesific investment return in your portfolio and a selected annual income rate. the table assumes that your income will be ajusted annually to allow for inflation,i.e. to maintain your standard of living. ( Also see the Cash flow calculator! ) Number of years before your income starts to reduce ( in today's money, i.e. after taking into account inflation of 6% per annum ) Investment return per annum ( before inflation & after fee) 2.5% 5% 7.5% 10% 12.5% 2.5% 21 30 50+ 50+ 50+ 5% 11 14 19 33 50+ 7.5% 6 8 10 13 22 10% 4 5 6 7 9 12.5% 2 3 3 4 5 15% 1 1 2 2 2 17.5% 1 1 1 1 1 ( Also see the Cash flow calculator! ) The number of years that your ILLA will last, increase or decrease according to: the investment return of the portfolio ( shown in the table above); the investment return is dependent on the asset allocation of your portfolio, your selection of funds and the fees charged in the portfolio; and your chosen income percentage (shown in the table above).

Selecting an appropriate income level for you age

As a further guideline, a major insurance company in South Africa has compiled a table which gives guidelines to help you in selecting an appropiate level of income for your age. You should note that the percentages in the table give an indication of the maximum percentages that should be withdrawn after fees are deducted. The levels are set to target an income that should not reduce in real terms (in other words after taking inflation into account) during your lifetime, and which will not exceed the regulatory maximum income rate. You should compare your current age to that in the table. Depending on your individual circumstances, it may be prudent to draw a lower amount. You should consult with the online financial planner before investing in an ILLA, and even more so if the ILLA is your only income and you require a pre-tax income that exceeds the level indicated in the table. If you are already invested in an ILLA, you should also cosult with the online financial planner if your portfolio is generating a real return of less than 2 % after fees and you require an income that exceeds the level in the table. The insurance company gives the following guidelines for the maximum level of income for your age. These guidelines are based on a portfolio that generates a real return of 2% per annum after fees are taken into account. Where a lower real return is generated, a lower income level should be considered. Use the cashflow calculator to see the effect of % income on the term. One of the bigger insurance company's guideline on maximum withdrawal levels: Age 55 60 65 70 75 80 85 Male 4.0% 4.4% 4.9% 5.6% 6.3% 7.3% 8.7% Female 3.5% 3.8% 4.2% 4.7% 5.2% 5.8% 7.0% ( Legislation allows you to draw an income of between 2.5% and 17.5% of the capital value of your ILLA investment. ) It is essential to choose an appropriate income level for your age. If you choose an income level that is to high, your capital value will not be sustained. In other words, your income will not increase and may even decrease with time. This means that you will have less purchasing power and you will not be able to maintain the same standard of living.

Choosing an appropiate asset allocation

It is important to find your tolerance towards risk. Although there are no specific limits prescribed by legislation for living annuities, the Association for savings and investment South Africa (ASISA) provides guidance on what may be considered prudent investment limitations; No more than 75% should be invested in equities. No more than 25% should be invested in property. No more than 25% should be invested in foreign assets.

Longevity risk

Longevity risk is prehaps the biggest risk to investment-Linked Living Annuities. In general, people are living longer today than previously. In retirement planning, you generally assume an age until which you require income. It is critical that you also evaluate the likely impact on your future income should you live longer than originally assumed, as longevity risk within an ILLA is borne solely by you.

Tax and Fees

Tax: The investments within an ILLA are not subject to income or capital gains tax. Only the annuity income is taxed in your hands and it is subject to individual tax rates. Fees: Product provider Administration fees (no administration fees for switching between underlying funds) Other Asset management fees for managing and trading the investments. Financial intermediary fees (negotiable with intermediatery) (A full breakdown of fees and charges will be given when you request a quote from a financial advisor in your town or direct from a financial advisor using this website)

Transfers

You may transfer the ILLA to a conventional annuity. Transfers is done at current market value with the provision that the relevant regulatory requirements are met.

Review each year

Note that markets and circumstances change. It is vital that you review your income level each year. You may be able to reduce the risk related to investing in an ILLA, by: investing part of your capital in a conventional life annuity, or selecting the underlying investment options that are most appropriate to manage your investment risk. Linked product companies offers a wide range of investment choices, including collective investment funds, shares and fixed instruments.

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  Conservative investors prefer stability and would rather protect existing investments before attempting to increase the value of their investment.
   
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ILLA | Investment Linked Living Annuity option at retirement

Retirement Planning

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