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One of the smartest, most tax efficient ways to save for your golden years is by means of retirement annuities and other long term, goal-focused investments. Aside from checking on your nest egg occasionally, most people don’t give a second thought to their retirement savings before maturity. However, if you’re thinking of leaving South Africa and moving abroad, it’s advisable to look at the bigger picture. If you’re living in South Africa and you are younger than 55, you do not have access to your capital. This changes when you move abroad. Unfortunately, the same does not apply to Living annuities.

What is a living annuity?

If you’ve got one, you should already know. A living annuity is an investment vehicle that puts you in the drivers’ seat, with a variety of investments to choose from. The biggest drawcard for a living annuity is the fact that you’ve got the flexibility of being able to draw money according to your needs and in line with the living annuity withdrawal regiment of 2.5% to 17.5% per annum. You’re also free to change service providers to switch up your investment strategy. What happens to a living annuity after death? If you’ve changed to a guaranteed annuity, you’re then able to leave a legacy for your loved ones – the remainder of your capital will be distributed to your beneficiaries after your passing. 

While it’s important to bear in mind that it’s your responsibility to ensure that you have sufficient income for the remainder of your lifetime, a living annuity is really only useful if you’re planning on retiring in South Africa or your beneficiaries remain in South Africa.

What is a retirement annuity?

A pension plan intended to help individuals build up their retirement nest egg in a tax efficient manner. This savings vehicle comes with a number of benefits. Unlike a pension or provident fund, where the ultimate decision rests with the trustees on how the funds will be paid out on death, with an RA, your appointed beneficiaries are paid out directly.

You are not taxed on retirement annuity returns like investment income, dividends and capital gains.

One of the biggest limitations of a retirement annuity is the rule that prohibits you from accessing capital before the official retirement age of 55. Obviously intended to help you stick to your retirement savings goal, this rule no longer makes as much sense if you’ve already permanently relocated from South Africa. In this case, financial emigration is the ticket to withdrawing your retirement annuities, after which it becomes possible for you to transfer your money abroad to do with as you please. This only applies if you have not yet retired from your retirement annuity after the age of 55.

Ok, so what happens when you retire?

With a retirement annuity, you are permitted to take a third in cash and you’re then obliged to invest the remaining two thirds, which is where the living annuity comes in. At this point you’ll choose between investing in a living annuity or a guaranteed life annuity – the living annuity is an investment product, while the guaranteed annuity is an insurance product. If you’re interested in weighing up the tax implications of a living annuity versus a retirement annuity, take a look at the South African Revenue Services website for a breakdown of how you’re taxed on retirement.

When you retire as a member of a pension fund, pension preservation fund or retirement annuity fund and you wish to take a portion of your capital as a lump sum, you are allowed to shift a lump sum that equates to a maximum of a third of the retirement interest in that fund, except when the entire value of your retirement portfolio with that Insurer does not exceed R247 500 (depending on your unique situation) in which case you may take the full retirement interest as a lump sum.

So you’re a South African living abroad. What exactly can you do with your annuities?

South African Living Annuities: the essential facts

Capital: You are not permitted to access the capital as lump sum unless it reaches the nominal limit of R50 000 (R75 000 in certain circumstances) and not even financial emigration will allow you to touch that capital.

  • This means you can (and should) invest the entire amount in a foreign currency denominated investment portfolio as this will give you the best chance at growth in a stable currency, protecting your capital against the volatility of the South African Rand. 

Income: The income you would receive from your annuity is paid out in South African currency and must be converted into foreign currency before it can be transferred abroad.

  • Your income level (between 2.5% – 17.5% of investment capital) and pay-out frequency (monthly, quarterly, annually) can be altered annually on your policy maturity date.
  • You will need a South African bank account and will have to consider the cost of international transfers when setting the payout frequency, and it is wise to consider capital preservation when selecting your income withdrawal level.

Full policy cash out: Once your living annuity contains less than R50 000 (R75 000 in some cases) you can cash out. While you can reduce your capital amount through an accelerated depletion strategy, this move will be subject to tax.

South African Life Annuities: the essential facts

In this case, your income level will be fixed and will increase on an annual basis according to the method you selected on signing up for this product.

Capital: It is not possible to access your capital under any circumstances.

Income: You’ll have to think carefully about the payment frequency you want. Depending on how you plan to access income in South Africa, it is worthwhile considering limiting the number of international transfers, given the costs involved – bank charges, commissions, SWIFT fees and the like. A smart workaround is selecting the option of having your income paid as an annual instalment in advance. The result is that you will  receive your retirement income from South Africa once a year and only a single offshore transfer is necessary to get your hands on it.

FinGlobal: There for your golden years

No matter what you’ve got planned for your retirement or where you plan to retire, when you’re ready to make your move FinGlobal will be there to help you with the transition. Take a look at our retirement annuity withdrawal services, and see how much easier we can make the whole process for you.

From start to finish, we will help you track down and wrap up all your retirement and investment policies, and give you the best possible tax advice – guiding you to ensure that you get your hands on your money in the most efficient manner that is 100% compliant with South African tax and exchange control regulations. All you have to do is contact us today to get started.