Can you cash in your South African living annuity?

As a South African planning for retirement, you’ve been diligently stashing cash into a pension, provident, preservation or retirement annuity fund for most of your working life. Buying a living annuity marks the transition from saving towards retirement to drawing from your retirement funds. Once you retire, you are required by legislation to use at least two-thirds of this investment to purchase an annuity income, which effectively becomes your pension income that pays out regularly during your retirement. It’s understandable that retirees find the available options for this decision overwhelming, and the fact that it’s such an important choice makes it vital to know the pros and cons of choosing a living annuity, including what you can do with your living annuity if you plan on emigrating abroad.

Before purchasing a living annuity, it’s essential to ensure you understand what you are signing up for. Here are the five most important facts about living annuities in South Africa.

Understanding annuities:

A living annuity is an investment, which means it is governed by the Long-Term Insurance Act

• Unlike life annuities, living annuities are investments linked to unit trusts, cash investments or share portfolios held in your name.
• Because it is not an insurance policy (like a guaranteed annuity), the living annuity does not insure you, the annuitant, against investment risk nor does it ensure that your investment will match your lifespan.
• There is no age limit for buying a living annuity, but the earliest you can retire from a retirement savings vehicle is the age of 55, meaning that a living annuity structure is available from this point onwards.

After your death, any capital that remains in your living annuity will be passed to  your heirs

• In contrast to a guaranteed annuity, where the capital ceases to exist on your death.
• This makes a living annuity a useful way to provide an income stream that can take care of a spouse or dependents after your passing.

Once the funds have been set up in the living annuity structure, you are obliged to draw a regular income on a monthly, quarterly, or annual basis

• You must draw a pension from your investment every year 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.
• The responsibility of ensuring that you don’t run out of capital rests with you.
• Your capital is linked to investment performance which means that an appropriate investment strategy is necessary for sustainable cash flow in your golden years.
• When choosing a living annuity, you must pay careful attention to fees that you will be charged as this will impact your capital and your drawdown.
• This also means that once you’re set up with a living annuity and you’re receiving a pension income, you cannot change your mind and cash it in.

Even on emigration, your living annuity cannot be cashed in

• Even if you emigrate and become a non-resident for tax purposes, you will not be able to cash in your living annuity, like you would a retirement annuity.
• You will need to have your living annuity proceeds paid out into a South African non-resident account, from where you will be able to transfer this money offshore as it is paid to you.
• Once the value of your living annuity drops below R50 000, you may withdraw your money as a taxable lump sum.

Tax and your living annuity: the lowdown

• The funds held in your living annuity will not attract dividends tax, capital gains tax, or income tax, although once you begin drawing an income from the fund, this income will be taxed at your marginal tax rate.
• Even if you become a tax non-resident, you will still be expected to pay income tax on this, as it is considered income with a South African source.
• There are certain tax perks to a living annuity, such as the fact that the transfer of funds into your living annuity is a tax-free transaction, and you will not be taxed on investment return. This is because you pay income tax on withdrawals according to the income tax tables.
• Lastly, your living annuity will not be subject to estate duty and any residual capital will be taxed either according to the retirement lump sum withdrawal or the income tax table, depending on whether your beneficiaries choose to take a lump sum or annuity income.

FinGlobal: cross-border financial service specialists

As an expat, managing your money from the other side of the globe can get frustrating, costly and cause unnecessary stress. Our team of tax practitioners, forex specialists and financial planners can simplify your life, helping to tailor a unique plan to get your money where you need it to be, in a cost-effective, time-efficient, tax-compliant manner. We can assist with all aspects involved in –

• Tax clearance
• Tax emigration
• Tax refunds
• Pension income
• Foreign exchange

Ready to hand over your headaches and put FinGlobal to the test? Leave us your contact details and we’ll be in touch to hear how we can help.