Annuities in South Africa: Living Annuity vs Life Annuity

What is a living annuity? What is a life annuity? Is there a difference between the two, and when would you need to purchase and use these annuities? Life and living annuities are both financial vehicles designed to fund your golden years of retirement. Let’s get straight into answering some of your questions.

 

What is a living annuity?

• Living annuities are retirement investment products that provide you with a pension income – they pay you a living once you hang up your hat as a member of the working world. 
• The rules around living annuities in South Africa mean that they are defined as “Restricted investments” because your access to the Capital and Income in the investment is limited.

 

When would you choose a living annuity?

Investors choose living annuities when planning for retirement because they offer the flexibility to:

• Set the amount of pension pay-out you receive (between 2,5% and 17,5% per annum of the capital balance),
• Set the payout frequency (monthly, quarterly, half-yearly and annually)
• Hand-select which underlying assets you want to invest your capital into, depending on whether it’s a conservative, moderate or aggressive investment portfolio. 

 

Considerations to bear in mind:

• There is a chance that you could outlive your living annuity.
• While living annuities offer more flexibility than regular retirement investments, there is always a trade off in risk, given that you choose your own underlying investments.
• That being said, up to 100% of these funds may be invested in offshore markets, which gives you the opportunity to boost your retirement nest egg by earning income in a more stable currency.
• Most importantly, at death, the capital benefit of a living annuity is paid out to your beneficiaries.

 

What is a life annuity?

A life annuity is a lot like a living annuity, except for one major difference. Choose your annuitisation carefully, because once it’s set, there’s no changing the income level or investments. However, once annuitised, there is no chance of the beneficiary outliving their retirement income as the pension is guaranteed for life.

• A life annuity has a higher initial risk (loss of capital at death), but lower long-term risk (income guaranteed for life). Once a life annuity is bought, no changes can be made to the income level or investment after the fact.
• As mentioned, there is no capital to pay to your beneficiaries after your death.

 

What can South Africans living overseas do with their annuities?

Living annuity rules: What you can and can’t do

Capital:

You cannot access the capital in your living annuity as a lump sum before it reaches the commutation limit of R50 000 (R75 000 in some instances), not even through financial emigration.

You can invest the full amount of your capital in a foreign currency denominated market, to leverage growth in a stronger currency and protect yourself against a fluctuating ZAR.

 

Income:

You can have your income paid out in ZAR and converted to foreign currency through an international funds transfer.

You can protect yourself against a weakening ZAR by investing the funds in offshore investments and earning income in the foreign currency.

You can adjust your income level (between 2,5% – 17,5% of investment capital) and payment frequency (monthly, quarterly, annually) annually at policy maturity date.

 

Consider:

• The cost of international transfers when setting payment frequency.
• Capital preservation and higher tax rates when setting income withdrawal level.

 

What should you do if you’re a South African expat with a Living Annuity?

FinGlobal offers a total solution for clients who need:

• Solid investment advice and cost-effective Investment Funds in local or foreign markets.
• Easy access to annuity income through secure online banking facilities for local and foreign payments.
• Accelerated depletion of investment funds in order to transfer the capital from South Africa.

 

Life annuity rules: What you can and can’t do

With a life annuity, the income level has already been fixed and will increase annually based on the annuitisation method selected when you signed up for the product.

Capital:

You can surrender and terminate when the capital in the policy is less than R50 000 (R75 000 in some instances).

You cannot accelerate the depletion of the capital in the investment, nor can you access the capital on financial emigration.  and Financial Emigration also does not allow you access to the Capital.

 

Income:

You can have your income paid into your local bank account, once it’s been converted from Rands.

 

Consider: the cost of international transfers must be considered when choosing your payment frequency.

 

FinGlobal: a trusted South African financial services provider

If you’re looking for a partner to handle your financial affairs in South Africa, or to assist you with investing your living annuity capital offshore and transferring funds abroad, we can take care of it all for you.

Our in-house financial planning expertise and close working relationships with all major insurance providers and investment houses mean that FinGlobal is perfectly positioned to offer you the full service package: competitive exchange rates, low fees, streamlined processes and highly personal attention on matters relating to:

• Retirement annuity withdrawal
• Financial emigration
• Tax clearance
• Tax refunds
• Tax emigration
• Foreign exchange
• Pension fund income

To find out more about our financial services for expats, leave us your contact details and we’ll be in touch.