Living Annuity Rules South Africa
If you’re a South African with a retirement annuity living abroad, in other words earning a pension income from your post retirement investment, note some important changes that have been made by our National Treasury in response to the Covid-19 pandemic. Intended to alleviate cash flow constraints of retirees, and to offset the risk of poor performance in life’s most important investment, the Minister of Finance made changes that relax the rules on drawdown rates as well as full remaining value lump sum withdrawals from South African living annuity investments.
Living annuity vs life annuity: what’s the difference?
A guaranteed life annuity provides a guaranteed income for life with annual increases, as well as the assurance that you won’t outlive your capital. Life annuities do not leave capital for your dependents to inherit once you pass on. A living annuity is a policy that gives you control over your capital’s growth by choosing from a variety of investments. It gives you the flexibility of being able to withdraw an income according to your needs, in line with the living annuity withdrawal allowance of 2.5% to 17.5% per annum, which has temporarily been increased to 20% of the current market value. A living annuity is a market-linked investment and will fluctuate depending on the performance of its underlying investment portfolio.
What are the changes to the living annuity withdrawal rules in South Africa?
The 2020 Disaster Management Tax Relief Bill amends Section 1(1) of the Income Tax Act (Act 58 of 1962) which covers the regulation of living annuities. The changes allow for the relaxation to certain prevailing living annuity product rules for a specified time period. These regulation changes have been made to assist those retired individuals facing the risk of cash flow problems or significant losses resulting from a decrease in the value of asset classes in which their living annuities are invested.
Before these amendments, it was only possible to change the withdrawal rate from a living annuity on the anniversary of the policy conception and was limited to withdrawals at the lowest limit of 2.5% of the capital amount and at an upper limit of 17.5%, which means that retired individuals have effectively fixed their income for a whole year, even though circumstances might change.
This leaves retirees in a bit of a bind if other income sources dry up (due to Covid-19 work and travel restrictions) or having to deal with a significant increase in living costs or additional unforeseen expenses during a global pandemic. On the other side of the equation, investments underlying the annuity are at risk. Plummeting stock markets and interest rates have affected the value of their capital investments. In a situation like this, annuity holders have the choice to reduce their annual withdrawal amount to preserve their capital, where possible.
What are the living annuity rule changes and how do they affect South African expats?
| What does the 2020 Disaster Management Tax Relief Bill change? | How long does this apply for? | What was the pre-Covid-19 statutory position? |
|---|---|---|
| If you currently receive an income from a living annuity, you can temporarily adjust the withdrawal percentage between 0.5% and 20% of the current market value of the portfolio, without having to wait for the anniversary date of the annuity policy. | A limited four-month period, from 1 May 2020 to 31 August 2020, after which the percentage will automatically revert. | Under normal circumstances, you can only adjust within legislated limits for living annuity percentages is 2.5%-17.5%. |
| You can withdraw the full value of your living annuity if the value is below R125 000. | This change will continue to apply after the four month period. | Withdrawal was only possible if the value was R50 000 or less (if a lump sump was taken at retirement) or R75 000 (if no lump sum was taken). |
When do these living annuity rules apply?
What does the 2020 Disaster Management Tax Relief Bill change? How long does this apply for? What was the pre-Covid-19 statutory position? If you currently receive an income from a living annuity, you can temporarily adjust the withdrawal percentage between 0.5% and 20% of the current market value of the portfolio, without having to wait for the anniversary date of the annuity policy. A limited four-month period, from 1 May 2020 to 31 August 2020, after which the percentage will automatically revert. Under normal circumstances, you can only adjust within legislated limits for living annuity percentages is 2.5%-17.5%. You can withdraw the full value of your living annuity if the value is below R125 000. This change will continue to apply after the four month period. Withdrawal was only possible if the value was R50 000 or less (if a lump sump was taken at retirement) or R75 000 (if no lump sum was taken). When do these living annuity rules apply? Any changes made during the period 1 May 2020 – 31 August will only be applicable for these four months. Once this period has lapsed, on 31 August 2020, drawdown rates will revert to normal. It is important to note that these rule changes do not make it possible to change the annuity frequency, this is still only permissible on the policy anniversary.
Can I cash in/withdraw my South African annuity?
So you’re a South African living abroad. What exactly can you do with your annuities? Thanks to these recent legislative changes, where your living annuity has a capital value of below R125,000, it is possible to access and pay out the full amount.
South African Living Annuities: Can I access/withdraw the capital in my living annuity?
Accessing the capital as a lump sum was not previously possible before it reached the nominal limit of R50 000 (R75 000 in certain circumstances). Not even financial emigration would let you touch this money, but legislative amendments have increased this figure to R125,000.
South African Life Annuities: Can I access/withdraw the capital? It is not possible to access your capital under any circumstances.
Still confused about the changes to drawdown rates and full remaining value lump sum withdrawals from your South African living annuity investments? That’s what we’re here for.
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We help South African expats with a range of services that meet their needs around retirement annuity withdrawals, pension incomes, tax clearance certificates, financial emigration, foreign exchange or exchange control advice.
To find out how we can help make your financial life easier as a South African expat contact FinGlobal today.