Because interest rates are so low, it is essential that retirees understand the differences and associated risks between fixed and a living annuities.

A Fixed Annuity is a single annuity, payable for one's lifetime, to cease at death. A guarantee period should be chosen and therefore, with a 10-year guarantee, if the annuitant dies after six years, the beneficiary would get the annuity for the unexpired portion of the guarantee period, that is a further four years.

A Joint Annuity is available to married persons or to common-law partners. The annuity is paid until the death of the survivor.

As the annuity is based on the life expectancy of both partners, the annuity rate will usually be lower than that offered to a single annuitant.

Annuity rates can differ significantly, so it is advisable to canvass the market for the best rate.

In respect of each of the above annuities, either a level annuity or an escalating annuity may be selected. The higher the annual escalation, the lower the annuity will be on commencement.

A Living Annuity is generally more appropriate for people who do not require income to pay or support living expenses.

Funds are placed in a portfolio of one' s choice. Investors, subject to recent amendments under Regulation 28, may elect to structure the fund as conservatively or aggressively as they wish.

The annual income draw down derived is based on a percentage of the fund value each year, with a minimum draw down of 2.5% and a maximum of 17.5%. On an investor's death, dependants may continue with the annuity or have the remaining value paid over immediately, subject to tax.

There may be circumstances in which taking an annuity, rather than the lump sum, is preferable.

Some crucial considerations:

• In the case of a Fixed Annuity, the rate is fixed at inception. With interest rates so low, you could be locked into a low rate for life. But if interest rates are higher, you would fix at a higher rate;
• The buying power of a fixed annuity will diminish over time as inflation erodes its value. After nine years, at 8% inflation, the annuity will buy half of what it would today.
• A Living Annuity may be converted to a conventional one, but not the other way around.
• With such low interest rates, fixing your annuity may not be the answer, but if interest rates rise, you could switch from a Living to a Fixed Annuity and reduce your risk.
• The advantage of a Living Annuity is that it does not form part of your estate for estate duty, nor does it attract income tax on interest earned or on capital gains.

Bryan Hirsch is financial advisor. Emailbryan@bhca.co.za web.www.bhca.co.za