If you have a retirement annuity or pension fund, you’re going to need to know about living annuities at some point in the future. This is because when you retire, it is compulsory to spend at least two thirds of your retirement savings on an annuity if your fund value is more than R247 500. At retirement, you’ll have a choice between two types of annuities – guaranteed and living annuities. A living annuity is one of the most popular ways to ensure your income once you’ve stopped earning a paycheck, so let’s take a quick look at the five most important things you need to know about living annuities.
What is a living annuity?
It’s meant to replace your employment income once you retire
If you’ve been paying into a pension, pension preservation or retirement annuity fund, you’re going to need to purchase an annuity to provide income for your retirement. You must spend at least two-thirds of your nest egg on purchasing an annuity (if your fund value is more than R247 500), but there is no rule that stops you from applying the full amount of your funds to purchasing an annuity for your golden years.
There are two types of annuities: guaranteed and living annuities. While a guaranteed annuity is a product from a life assurance company that guarantees to pay a set monthly pension (i.e: it remains unchanged) for the rest of your life, a living annuity gives you more flexibility over the income you can earn with more investment choices.
Read more about the differences between living and guaranteed life annuities.
There are two major advantages to a living annuity: Greater control and flexibility over your retirement income: with a choice in how to invest your money within the investment options offered by your provider, your retirement income is linked to the success of your investments and not fixed, like it is with a guaranteed annuity.
A legacy to pass to those you’ve left behind: After your death, your beneficiaries inherit what is left of your capital, unlike a guaranteed annuity where your capital passes with you.
There are some strict rules around what you can and can’t do with your living annuities in South Africa
- You can only pay into a living annuity out of a retirement fund or another living annuity.
- You can transfer a living annuity policy from one provider to another but you can’t merge two living annuities into one.
- You must make a draw-down from your investment each year – at least 2.5% but not more than 17.5% of the annual value of the residual capital at policy anniversary date.
- You can choose to receive your income monthly, quarterly, semi-annually or annually.
- You can amend your draw-down rate each year, but this must be done before the policy inception anniversary date.
- You can switch a living annuity into a guaranteed annuity, but you cannot switch a guaranteed annuity to a living annuity.
There are significant tax benefits to a living annuity:
- Transferring funds into your living annuity is tax-free. You are not not taxed on your investment return, instead you pay income tax when you draw a pension according to income tax tables.
- After your death, your living annuity will not be subject to estate duty and any remaining capital will be taxed according to the retirement lump sum withdrawal table or the income tax table where beneficiaries choose to either receive a lump sum or as an annuity income.
Here’s the deal if you want to cancel, surrender or cash out your living annuity:
The rules here have changed a little. Previously a distinction was made between whether or not you’d made a lump sum withdrawal at retirement – if you had, you could only withdraw the full value of your investment if the value was below R50 000. If you had not used your withdrawal opportunity at retirement, you could get the full amount where it was less than R75 000. 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.
FinGlobal: Cross-border financial services for South Africans
Picking the right annuity fit for your retirement is a tough decision, but choosing a partner to handle your cross-border retirement money moves shouldn’t be. FinGlobal has built a solid reputation as a choice financial services provider for South African expats across the globe.
Our 100% success rate in everything we do speaks for itself. We’re ready to help you transfer your retirement/ pension income out of South Africa so that you can enjoy your retirement without worrying about the paperwork. You can even hand your expat tax affairs over to us, and we’ll handle your compliance, queries and refunds – no worries!
To see how FinGlobal can help you with your money moves, leave us your contact details and we’ll be in touch to make your life easier.
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