Living vs life annuity: Which is best when planning to retire abroad?

For many soon-to-be retirees, a big decision is looming on the horizon: living or life annuity when converting your retirement annuity to provide an income for the next chapter of your life. Then, there are usually other big decisions to make, such as whether to remain in South Africa, travel, or settle down overseas now that the kids are grown and work no longer ties you to one location. When making these decisions, there is much to consider to properly structure retirement income to meet your current and future needs, wherever you are. Let’s look at some of our clients’ most frequently asked questions about living vs life annuities, your pension income and global travel.

1. I am due to retire soon. Which is best for me: living or life annuity for my retirement income?

Both living and life annuities are solid retirement investment income options in South Africa, but they offer distinct advantages and disadvantages. Here’s what we mean:

Benefits of a living annuity in South Africa:

• Flexibility: You can control your investments and adjust your living annuity income drawdown rate based on your needs and market conditions.
• No guaranteed income: There’s no guarantee of income for life. The amount you receive depends on the performance of your investments and your chosen drawdown rate.
• Capital preservation: You retain ownership of your capital, which can be passed on to your heirs.
• Drawdown limits: You can withdraw a certain amount annually (typically 2.5% to 17.5%), and this amount can only be adjusted once per annum, on the policy’s anniversary.

Benefits of a life annuity in South Africa:

• Guaranteed income: You receive a fixed income for life, regardless of market conditions.
• No capital preservation: You forfeit your capital when purchasing a life annuity.
• Longevity risk: If you live longer than expected, your income may not be sufficient to cover your expenses.
• Limited flexibility: Once purchased, you cannot change the income amount or investment strategy, except for minor adjustments due to inflation.

Key differences between living and life annuity in South Africa:

• Control: Living annuities offer more control over investments and income.
• Risk: Life annuities provide guaranteed income but carry longevity risk.
• Capital: Living annuities preserve capital, while life annuities do not.

Choosing the right option: The best choice depends on your circumstances. Consider factors such as:

• Risk tolerance: Are you comfortable with the potential for fluctuations in income?
• Longevity: How long do you expect to live?
• Inheritance: Do you want to leave an inheritance to your heirs?
• Income needs: How much income do you require in retirement?

Read more: The big misconception about living vs retirement annuities.

What are my options if I want to travel after retirement and possibly emigrate?​​

When considering retirement abroad, a living annuity is generally more suitable than a life annuity. Here’s why:

Living annuity advantages for retirement abroad:

• Flexibility: Living annuities allow you to adjust your income drawdown rate to align with your expenses, which can fluctuate depending on your location and lifestyle.
• Currency exchange: If you live in a country with a different currency than your annuity, you can more easily manage currency exchange risks and potential fluctuations.
• Inheritance: Living annuities allow you to pass on any remaining capital to your heirs, which can be beneficial if you have family or assets in South Africa.

Life annuity disadvantages for retirement abroad:

• Fixed income: A life annuity provides a fixed income, which may not be sufficient if your expenses increase due to rising living costs or unexpected events.
• Currency exchange risk: If your annuity’s currency depreciates relative to your retirement location’s currency, your purchasing power will decrease.
• Limited flexibility: Life annuities offer limited flexibility in adjusting your income or investment strategy, which can be challenging if your circumstances change.

A living annuity offers more flexibility, control, and adaptability, making it a better choice for individuals planning to retire abroad.

3. Any clever tips or tricks to enjoy my pension income while travelling or living overseas?

When deciding about your retirement income, it’s essential to know that regardless of whether you choose a living or life annuity, the income derived will need to be paid out in Rands and into a South African bank account. Once you are drawing income, either a living or life annuity is not portable.

Read more: What happens to my living annuity if I emigrate from South Africa?

Once your pension income is paid out into a local account, you can convert the funds into the required currency and transfer them into an offshore bank account using an international money transfer from South Africa. The funds underlying your investments will remain in South Africa, and you will also be taxed on your annuity income in South Africa, as this counts as income sourced locally.

If you’re concerned about the potential devaluation of your Rand-denominated annuity while living abroad, a living annuity can be a more effective way to mitigate this risk.

A living annuity offers a flexible retirement income solution where you choose investment portfolios in consultation with a financial planner. You then receive a monthly income based on the performance of these investments. While the annuity is South African, you can allocate your funds to global feeder funds, gaining exposure to international markets. You could invest 100% of your retirement assets in these global feeder funds. If the South African Rand weakens, your investments in foreign assets could appreciate, potentially offsetting some of the currency loss. However, the opposite is true if the Rand strengthens.

Living annuities also allow you to withdraw up to 17.5% of your investment value annually. This strategy allows you to gradually transfer funds offshore over time, potentially diversifying your retirement income and mitigating currency risk.

Unlike a living annuity, a life annuity offers a guaranteed income stream. No investment component means you can’t allocate funds to offshore markets. Instead, your annuity provider assures you a fixed, Rand-denominated income in exchange for your retirement savings.

While there is no perfect solution for retiring abroad, strategically making the decision can help make it more feasible. Creating an optimal retirement income plan for your specific goal involves many factors, making it essential to consult a qualified financial planner. They can help you create a tailored plan that ensures sustainable income, tax efficiency, and appropriate asset diversification.

Read more:

• South African Retirement Annuities: what can you do with them before and after emigration?
• Retirement annuity policy surrender in South Africa: 3 important things for expats to understand
• Tax implications of emigration on your South African retirement funds.
• I currently receive a regular income stream from my pension fund in SA. Can I transfer the capital abroad?

Tax on annuity income in South Africa

Even though your pension income originates in South Africa, it might be subject to taxation in both your home country and South Africa. However, a tax relief measure is in place, usually in the form of a Double Taxation Agreement between countries. As mentioned, your pension income must be paid into a local bank account before being transferred abroad via international money transfer from South Africa. You must use one of the exchange control allowances to make this move.

• If you remain a South African tax resident, you can transfer up to R1 million annually offshore without prior tax clearance using your Single Discretionary Allowance.
• If you exceed this limit or terminate South African tax residency, you must follow the SARS Approved International Transfer (SARS AIT) process.

Read more: Navigating dual taxation: How to avoid double taxation on overseas transfers.

Maximising your South African annuity income abroad

If accessing your South African pension income from abroad, here are some tips to help streamline your affairs:

• Maintain a South African bank account: This is essential for receiving your pension payments.
• Review fund rules: Understand your options for adjusting payment frequencies to reduce forex transaction fees.
• Consider annual payments: If your fund allows, opt for an annual lump sum payment to simplify tax obligations and reduce transfer costs.

By carefully planning and understanding your retirement fund rules, you can ensure a smooth transition to your retirement, wherever it takes you while continuing to receive your South African annuity income.

But wait. There’s one last option made available by emigration.

Suppose you choose to emigrate from South Africa, and you don’t need to access funds in your retirement annuities right away. In that case, you can delay the life vs living annuity decision and withdraw your retirement annuity funds instead.

Once you’ve emigrated from South Africa and ceased your South African tax residency (by completing tax emigration), you can generally cash in your retirement annuity in full after the prescribed three-year waiting period. This is subject to tax regulations and the specific terms of your retirement annuity, and you’ll typically have to provide proof of your emigration and new tax residency to the retirement fund administrator.

Once approved, the fund will process the payout. However, it’s important to note that such a move has tax implications, so it’s advisable to consult with a tax professional to understand the specific tax consequences and ensure you’re following the correct procedures.

Read more: Golden years, global money moves – an offshore remittance guide for SA retirees.

FinGlobal: retirement annuity encashment specialists

Need help choosing the right financial path? FinGlobal can assist. We’re ready to help you make the right decision for your future by enabling you to create a Personalised Financial Emigration Plan™ to help you achieve your financial objectives. We offer a full suite of financial services for South Africans worldwide, including retirement annuity withdrawal, tax clearance and tax refunds, international money transfers, exchange control and more.

To get started with our trusted, convenient services, please leave your contact details in the form below, and we’ll contact you to discuss your requirements.