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What Happens To Your Retirement Annuity In South Africa When You Retire?

By May 19, 2020October 12th, 2023Financial emigration, Retirement annuities

What Happens To Your Retirement Annuity In South Africa When You Retire?

May 19, 2020


You’ve been paying diligently into your South African retirement annuity fund your whole life, and now you’re ready to take it to the next level. You’re ready to retire. What happens now? Let’s talk about how your retirement annuity pays out, and what your options are on retirement. 


What happens to a retirement annuity on retirement?

When you turn 55 this is usually when you retire and your retirement annuity policy matures. You’ll have a few options at this point, and a number of important decisions to make. The first decision you’ll have to make is whether or not you’re going to exercise your option to withdraw one third of your retirement annuity fund in cash. The remaining two-thirds, however, must be used to purchase an annuity that provides income for your retirement – usually a living or a life annuity.

It’s not compulsory to take the one-third lump sum withdrawal, so you can purchase a living annuity with your full retirement annuity amount, thereby converting your retirement annuity into a living annuity. Bear in mind that if you do choose to take the one-third lump sum, you’ll be taxed according to the special retirement fund lump sum benefit table. As it stands, the first R500 000 is tax free. Thereafter, a fixed, banded tax table applying to amounts over R500 000.

The second decision you’ll have to make is a choice between investing your retirement annuity funds in a living annuity or a guaranteed life annuity. What’s the difference? Long story short, the living annuity is an investment product while the guaranteed annuity is an insurance product. With a fixed annuity (life annuity) your RA lump sum is used to purchase a fixed income. As to when it stops paying out, that depends on the type of annuity you purchase. The two most popular options include: a single life annuity and a joint life annuity. A single life annuity is designed to give you an income for as long as you live. In other words, if you pass away in the second year of your retirement the insurance company keeps your money but if you live to 122, they’ll still have to pay out your income. If you’re married, a joint life annuity is useful for insuring your spouse, which means that if either of you pass away the other will still receive an income. Insurance companies package annuities with varying guarantees, so be sure to do your research so you know exactly what risk you’re buying.


Some of the most annuity common options for you to choose from


The fixed annuity

  • Receive a pension income for as long as you live and it’s possible to elect to have your spouse continue to receive the income after your death.
  • No annual increase in payout, but there is an option to choose one – e.g. 3%, 5% or 10%, which has the effect of reducing the initial income you receive.
  • If no annual increase is selected, the initial pension amount is higher.
  • The major disadvantage here is that your income does not keep up with inflation, nor are you able to adjust your income level with time.


With-profit annuity

  • Your insurance company determines the increase annually, depending on underlying investment performance.
  • Your initial pension and increases as declared by the insurer are guaranteed for life, your income is paid as long as you are alive and transferrable to your spouse.
  • Your insurance company bears the risk of poor investment performance but you have no say over where your money is invested.
  • This means that pension payout increases can be low, or non-existent if markets are performing poorly.
  • Your pension increases can be low or even 0% if markets are performing badly.


Inflation-linked annuity

  • Your pension payout amount increases are based on inflation throughout the year.
  • Your income is protected against increases in the cost of living because it keeps up with inflation.
  • Pension is paid for as long as you are alive and your spouse can receive this income after you have passed.
  • The downside to this annuity is that pension increases can be low or even 0% if inflation is low or 0% respectively.


The living annuity

  • The level of income you require is determined annually by you with the assistance of a financial advisor – this can be anywhere within 2,5% and 17,5% of the investment value.
  • This annuity comes with the flexibility of deciding where to invest your money and the ability to tailor your income level.
  • The one major disadvantage is that you personally carry the risk of poor market performance — no guarantees.
  • With a living annuity there is the risk of outliving your retirement income – both in terms of living longer than expected and drawing too much income in the early stages of retirement.


What happens if you’re a South African abroad? What can you do with your living annuities? What are the living annuity rules?

When it comes to the capital in your living annuities, you are not allowed to gain access to the money as a lump sum before it reaches the nominal limit of R50 000 (R75 000 in certain circumstances). In other words, there can be no living annuity withdrawals. This rule is strict and not even financial emigration will allow you to touch that capital.

Take this as an opportunity to invest your entire amount in a foreign currency denominated investment portfolio – a smart strategy aimed at achieving growth in a stable currency to protect your retirement capital against the volatility of the ZAR.


What can you do with the income from your South African living annuity if you’re living abroad?

The income drawn from your annuity is paid out in South African currency and needs to be converted into foreign currency before you can transfer it abroad. Your income level (between 2.5% – 17.5% of your investment capital) and pay-out frequency (monthly, quarterly, annually) can be changed annually on your policy anniversary date.


What do you need to transfer your South African living annuity payouts overseas?

You will need a South African bank account and should consider carefully the cost of international transfers when setting the payout frequency on your annuity.

Can you do a full policy cash out on your living annuity?
Only once your living annuity contains less than R50 000 (R75 000 in some cases) can you make a withdrawal. While you could reduce your capital amount through an accelerated depletion strategy, you’ll be taxed accordingly, so proceed with caution.


What can you do with your South African life annuity when you’re living abroad? What are the rules?

With a life annuity, your income level is usually fixed and increases annually in line with the provisions of your policy. Unlike a living annuity, it is not possible to access the capital in a life annuity, under any circumstances – no withdrawals. In determining your income level, you’ll need to think carefully about your payment frequency. Depending on how you plan to access that South African income, it is worthwhile limiting the number of international transfers, given the costs involved as bank charges, commissions, SWIFT fees can add up quickly.

In this case it makes sense to opt to have your income paid as an annual installment in advance, which means that you’ll get your retirement income from South Africa once a year and you’ll only need to make a single offshore transfer to get your hands on it.


FinGlobal: financial services for South African expats

Need some help handling your cross-border finances after retirement? We’ve got it covered. No matter what you need – tax clearance certificates, financial emigration, foreign exchange or exchange control advice – we’re here to help you every step of the way.

Still got questions about managing your South African life/living annuities as an expat? Contact FinGlobal today.


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