One of the biggest concerns for potential emigrants from South Africa is obviously – “what happens to my retirement savings if I leave the country?” This question can only be answered with reference to the type of retirement savings you hold, along with your age at the time you emigrate and your current tax resident status in South Africa.
If you already have a living annuity, this generally means that you have already retired and you are over the age of 55. At this point, your options with regards to cashing in your living annuity are limited. Let’s take a quick look at the rules around living annuities in South Africa, and how you are affected.
Living annuity rules in South Africa
A living annuity is used to provide yourself with a regular income from your retirement savings once you have stopped working. According to retirement fund legislation, once you stop working, you must purchase either a life or living annuity with two-thirds of your total retirement savings, whether you are retiring from a pension, preservation, provident, or retirement annuity fund. One third of your savings can be withdrawn as a cash lump sum, at the time that you retire from the fund but only before you purchase an annuity.
What is the difference between a living and a life annuity?
A living annuity is suited to individuals who would like to receive an income when they retire, with the flexibility of being able to adjust their income level and the frequency thereof, on an annual basis to meet their changing financial requirements.
A living annuity gives you the flexibility to choose:
- How much annuity income you want to receive (subject to living annuity rules drawdown limits) which is usually somewhere between 2.5% and 17.5% of your investment value.
- How often you receive your income, whether this be on a monthly, quarterly, bi-annual or annual basis.
On the anniversary of your annuity policy each year, you are permitted to make a change to the amount and frequency of your income payouts. The major risk associated with having a living annuity in South Africa is that your income is linked to the performance of the underlying investments. This means that if the investments perform poorly, there is a chance that you will outlive your living annuity, which is not ideal. However, any balance remaining in your living annuity after your death is transferable to your heirs.
A life annuity is also used to provide yourself with a regular income from your retirement savings once you have stopped working, but unlike a living annuity, this amount is fixed and cannot be changed except to account for inflation. Nonetheless, as long as you live, you are guaranteed an income with a life annuity.
Can I change from a living annuity to a life annuity?
You are allowed to convert your living annuity to a life annuity, but you cannot convert a life annuity to a living annuity.
Can I transfer my living annuity to another provider?
This is known as a section 37 transfer of a living annuity, and is permissible in terms of the Long Term Insurance Act. There are certain fees and penalties that may apply, so it’s advisable to investigate the implications fully before committing to such a transfer.
Can a living annuity be cashed out in South Africa?
No, a living annuity cannot be cashed out in South Africa. This is because a living annuity is a type of financial product that is meant to support you financially during your retirement with income generated from the investment of your savings. As such, it is not possible to take a lump sum withdrawal from the capital you have invested into the living annuity.
Living annuity withdrawal in South Africa
According to the living annuity rules in South Africa, you may not withdraw from your living annuity policy unless the value of your policy is lower than the mandated minimum, which is currently R125 000. If this is the case, you may request a full lump sum withdrawal, which will be subject to the retirement fund lump sum tax tables as determined by the South African Revenue Service (SARS).
Your policy provider will apply to SARS for a tax directive on your behalf, which allows SARS to take their tax cut before authorising the insurer to pay out the balance of your annuity. It is important to bear in mind that effective 1 March 2021, SARS applies the R125,000 withdrawal limit on an aggregated basis across all living annuities held by an individual with the same insurer. This means that SARS may allow the first withdrawal of a living annuity if it falls below R125,000, but thereafter withdrawals from the same insurer (on another policy) can be rejected once the value of the withdrawals add up to more than R125,000.
What happens to my living annuity if I move overseas?
Unless your living annuity is below the R125,000 minimum threshold, you will not be able to withdraw your savings in full. This means that you will need to have your annuity income paid out (at a frequency of your choosing) into a South African bank account, and transferred abroad. Such income is of course taxable, so you will need to ensure that you are registered with SARS and that you maintain tax compliance.
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