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Preparing adequately for your retirement is a worthy goal, the importance of which cannot be underestimated. There are a variety of ways to ensure that you’re financially equipped for life after your career, such as pension funds, retirement annuities, living annuities, life annuities and guaranteed annuities. If you’re considering a living annuity, or you already have one, here’s what you’ll need to know about living annuity rules if you leave South Africa permanently.

What is a living annuity?

A Living Annuity is a financial product purchased on retirement in order to pay you a regular income when you’re no longer receiving an employment paycheque. You can choose between two different types of annuities when you retire: a Guaranteed (Life) Annuity or a Living Annuity. When you retire from your pension, pension preservation or retirement annuity fund, it is compulsory to use at least two-thirds of your fund proceeds to buy an annuity, if your fund value is higher than R247 500.

At retirement you’ll be faced with a number of choices, one of which is choosing between purchasing a life annuity (which is effectively an insurance policy) or a living annuity (which is effectively an investment) where the value is determined by the performance of the underlying investment, such as unit trusts.

Why is a living annuity a good idea?

Living annuities are a popular retirement choice because they provide you, as the investor, with visibility and control over your money. You’ll also benefit from tax efficiency and flexibility in where you choose to invest.

When can you commute your living annuity?

At retirement you can commute one-third of your retirement fund, subject to special lump sum tax applicable to retirement fund withdrawals. Assuming you have not made any previous withdrawals, the first R500 000 is tax-free, after which you can expect to be taxed between 18% and 36%.

You’re probably asking yourself at this point: where does the tax efficiency come in? No tax is payable on transfers from your retirement fund into a living annuity – so the more money you shift into your living annuity, the better. Furthermore, no tax is payable on any investment gains and dividends earned in the living annuity.

If you are already retired, and you’re already receiving your annuity income from your living annuity, it is only possible to commute the remainder (in other words, cash out or withdraw as a lump sum) once your living annuity value drops below R50 000 (R75 000 in certain cases).

Can you convert a living annuity to a retirement annuity

No. It works the other way around, in real life. When you retire from your pension, pension preservation or retirement annuity fund, you are obliged to spend two-thirds of your fund proceeds on purchasing an annuity if your fund value is higher than R247,500.

What’s the difference between a life annuity and living annuity?

A life annuity is also known as a guaranteed annuity. Because it is a type of insurance, it is linked to the insured’s life and is guaranteed to provide you with an income that lasts as long as your life (and then as long as your spouse’s life).

  • The capital in a life annuity dies with you, and your heirs will not inherit anything from it.
  • Generally you cannot specify your initial income and there is no flexibility to make changes once you’ve purchased a life annuity.
  • There are various types of guaranteed annuities, so make sure you choose wisely, depending on your needs.

A living annuity is all about flexibility. You can choose your level of income annually (depending on statutory limitations) as well as have a say in where your money is invested. You can also choose the frequency of your annuity payouts.

  • The capital in a living annuity (if any remains) after your death is inherited by your heirs.
  • You run the risk of outliving your savings, as well as the risk that your investment returns do not perform as expected, which could result in a cash-strapped retirement. Can you cash in a living annuity?

The short answer: No. The longer answer: No, not even if you financially emigrate. The capital in your living annuities is untouchable before you retire.

What can you do with your living annuity if you’re living abroad?

Transfer it abroad, obviously! The income you draw from your living annuity will be paid out in South African currency. All you’ll need to do is convert it into foreign currency and make an international transfer.

On the anniversary date of your policy inception (the date you signed on the dotted line) you will be able to vary your income level (between 2.5% – 17.5% of your investment capital) and change the pay-out frequency (monthly, quarterly, annually) as well.

FinGlobal: Financial services for South African expats

If you’ve still got questions or concerns  about managing your South African life/living annuities as an expat, we can help. Whether you need assistance with transferring your living annuity income abroad, or you need foreign exchange expertise, FinGlobal has everything you need under one roof.

We offer a comprehensive end-to-end financial service portfolio for expats, and we’re ready to help you with:

  • Cashing in your retirement annuity
  • Getting tax clearance from SARS
  • Foreign exchange matters
  • Exiting the South African tax system
  • Getting tax refunds from SARS
  • Emigrating financially
  • Pension income transfers

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