Answer:
Living annuities are a much-maligned part of the financial investment scene. Yet, provided they are properly managed, they offer significant benefits, particularly for the wealthier, perhaps more sophisticated investor. There are certain constraints to take into account, chiefly that a living annuity can only be utilised at retirement, typically when a retiree is compelled by law to invest in what's known as a 'compulsory purchase annuity'.

That has to be done with two thirds of the maturity value from an RA or pension fund ? many provident fund rules allow the retiring member to invest in such annuities, but not all, so check this out first.

Basically a living annuity should be viewed as an alternative to traditional annuities and they stack up pretty well in the process. Firstly, the investor can decide how the money is to be invested. Choices are numerous ? including unit trusts, guaranteed funds, privately managed share portfolios, cash and alternative investments. Offshore investment portfolios can also be utilised.

Don't draw too much

They are also flexible in that the amount of income you draw from them can be adjusted each year and capital remaining at death can be bequeathed to dependants. The big trick is to avoid drawing too much from the annuity, thus eroding the capital and gradually running the fund down. That takes discipline and you have to be fully aware of what the fund is earning so that you don't exceed its income.

Experts say that the amount should not exceed more than about 7.0 percent of the capital. Assuming the fund is earning 10.0 or 11 percent per annum, you are therefore receiving a good income, while also allowing the fund to grow slightly ? always a good idea.

That in turn suggests that you need to invest in pretty safe investments. For instance, taking a flyer on the stock market with the funds in the annuity is not a good idea, while putting the funds into a highly-rated money market fund earning solid, safe returns would be a good move. It makes sense to get the best advice you can on this issue.

Perhaps some of the biggest advantages of living annuities however are the tax benefits. Although sometimes overlooked, these are particularly attractive to high net worth individuals from a tax and estate planning point of view.

Portfolio changes can be made at any time and are exempt from CGT. In the event of sequestration, the capital is protected by law against creditors and on death the capital is exempt from executors fees and estate duty. This is a sensitive period of your investment life so I would strongly advise that you seek the help of an independent financial advisor.