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You’ve been diligently paying into your retirement annuity or pension fund your whole working life, and you’re finally nearing retirement. What do you do next? What’s your next move? Once you’ve stopped earning a paycheck, your retirement savings are supposed to carry you through your golden years. One of the most popular ways to do it is by means of a living annuity. Here’s what you need to know.

What is a living annuity?

A living annuity is a financial product designed to fund your retirement by paying you a regular income. Upon retirement, you are obliged to use at least two-thirds of your fund proceeds (pension, pension preservation or retirement annuity fund) to purchase an annuity where your fund value is more than R247 500.

At retirement, you’ll choose between two types of annuities:

  1. Guaranteed Annuity
  2. Living Annuity

Guaranteed Annuity vs Living Annuity: what’s the difference?

Guaranteed Annuity:

  • Insurance product from a life assurance company that guarantees to pay you a set monthly pension for the rest of your life.
  • This insures you against outliving your retirement savings (longevity risk) and minimises the chances of depleting your capital too soon due to inadequate investment returns (investment risk).
  • No matter how old you live to be this pension is paid to you until you die. On your passing, your capital dies with you and not transferred to your heirs.
  • In return for a guaranteed income, you assume the risk that you might die sooner than expected, in which case your heirs lose out on your savings unless the policy incorporates a guarantee period or a spousal benefit.

If you’d prefer to avoid such risk, you might consider choosing a living annuity.

Living Annuity:

  • An investment product that gives you control and flexibility over your retirement income – you choose how to invest your capital within the bouquet of investments offered by your provider.
  • You take the risk of securing an adequate income for life in return for more investment flexibility.
  • Unless you’re experienced with investments, it’s advisable to consult a retirement planning advisor for guidance on the right draw-down rate and asset allocation for your retirement goals.
  • Upon death, your beneficiaries inherit what is left of your capital.

What happens to a living annuity on death?

  • Guaranteed annuity: your capital passes when you pass.
  • Living annuity: your heirs inherit the remainder of your capital.

What are the rules on living annuities in South Africa?

  • You can only pay into a living annuity with proceeds from a retirement fund or another living annuity.
  • You can add the proceeds from a retirement fund to your existing living annuity.
  • You can transfer a living annuity policy from one provider to another but you cannot merge two living annuities into one. 
  • You must draw a pension from your investment every year – draw-down – and this must be at least 2.5% (but no more than 17.5%) of the annual value of the residual capital at the policy anniversary date.
  • You can change your draw-down rate year-to-year, but you must make your election before the anniversary date of your policy inception.
  • You can choose to receive your income monthly, quarterly, semi-annually or annually.
  • You can convert a living annuity into a guaranteed annuity, but you cannot convert a guaranteed annuity to a living annuity.
  • You can hold both types of annuities at the same time or even purchase a composite annuity – that combines both living and guaranteed –  under a single life assurance policy.

What are the tax benefits of a living annuity?

  • The transfer of funds into your living annuity is tax-free and you  are not taxed on investment return, instead you pay income tax on withdrawals according to the income tax tables.
  • Your living annuity is not subject to Estate Duty and any residual capital is taxed either per the retirement lump sum withdrawal or the income tax table where  beneficiaries choose to receive a lump sum or as an annuity income.

How to surrender a living annuity

Looking to cancel, surrender or cash out your living annuity? Here’s the deal:

Recent changes in living annuity withdrawal rules there is no longer a difference in withdrawal amounts if you have previously withdrawn from your living annuity or not. Therefore if your living annuity is a value of R125 000 or less, it can be withdrawn.

Previously, the rule stated:

  • If you made a cash withdrawal at retirement, you are permitted to withdraw the full value of your investment if the value of your living annuity is less than R50 000.
  • If you did not make a withdrawal at retirement, you can take the full amount from your living annuity if less than R75 000.

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