Purchasing a living annuity signifies the shift from accumulating retirement savings to withdrawing income. This critical decision requires careful consideration, ideally with guidance from an independent retirement expert. This article addresses common client questions about living annuities, helping you make informed choices to secure your financial future during retirement.
Who can buy a living annuity?
Anyone who is retiring from a pension, provident, preservation or retirement annuity fund can choose to purchase a living annuity. In other words, if you are invested in a registered retirement fund, the option of buying a living annuity is available to you. You cannot purchase a living annuity using funds housed in a discretionary investment, as living annuities are exclusively reserved for the investing of retirement benefits regulated by the Pension Funds Act.
How do I go about setting up a living annuity?
While setting up a living annuity is administratively straightforward, several critical decisions must be made beforehand. First, determine whether to commute up to one-third of your retirement fund as a cash lump sum or invest the entire amount, considering the tax implications of a withdrawal. Next, carefully evaluate inflation and longevity risks, as a living annuity is an investment in your name and does not guarantee income for life, unlike a life annuity. You’ll also need to select an appropriate investment composition and asset allocation that aligns with your financial goals. Choosing the right investment platform is equally important to ensure your annuity meets your specific needs. Additionally, consider your risk tolerance, desired investment returns, and the timeframe over which your funds must sustain your retirement. Each of these factors plays a pivotal role in ensuring that your living annuity supports your long-term financial security.
Are there minimum contribution limits?
The minimum investment amounts for living annuities vary between R50 000 and R100 000 depending on the financial institution or investment platform, so it’s advisable to consult with individual institutions or a financial advisor to determine the most suitable option for your retirement planning.
Can I make additional contributions to my living annuity?
Living annuities are retirement income vehicles designed to provide flexibility in managing post-retirement investments. This means that, when purchasing a living annuity, it must be funded with a contribution from a compulsory retirement fund. Further, once set up, a living annuity does not allow for ad hoc or multiple contributions from discretionary funds. This is because living annuities are post-retirement products funded solely by retirement savings at retirement and must comply to legal restrictions in terms of income payments. There are also strict rules relating to adding funds from subsequent retirement funds, and it is best to confirm with the investment platform hosting the living annuity whether this option is available.
Is there an age limit for purchasing a living annuity?
No, there is no specific age limit for purchasing a living annuity. However, the purchase of a living annuity is typically tied to reaching retirement age, which is generally considered to be at least 55 years old.
Can I invest offshore through a living annuity?
Yes, if you are invested in a living annuity, the policy falls under the Long-Term Insurance Act and therefore your investment is not subject to Regulation 28 of the Pension Funds Act which limits offshore exposure. As such, you can elect to invest 100% of your living annuity assets offshore, depending on your goals and objectives. That said, bear in mind that your investment will need to be in a Rand-denominated offshore feeder fund as you are not permitted to take your investment directly offshore in the form of foreign-domiciled funds. Some investment platforms may limit the amount of offshore exposure that you can have due to foreign allowances applicable to the life company that issues the living annuity or the underlying unit trust provider.
How much can I draw from my living annuity?
Legislation permits you to draw a pension income from your living annuity between 2.5% per year and 17.5% per year of the value of the residual capital. You can choose to draw down on a monthly, quarterly, bi-annual or annual basis, depending on your circumstances, and you have the option to adjust your draw-down rates every year on the annuity anniversary date. Bear in mind that higher rates of withdrawal may deplete your annuity capital faster, thereby increasing the risk of outliving retirement funds. It is therefore advisable to consult with a financial advisor to select an appropriate withdrawal rate that balances income needs with long-term sustainability.
Will I be taxed on my investment gains?
No, investors will not be taxed on investment gains within a living annuity. The growth on investments inside a living annuity—such as interest, dividends, and capital gains—is tax-free. This tax-efficient structure allows the capital to grow without being reduced by taxes on returns.
How will my drawings be taxed?
Income from a living annuity is taxed as personal income, with the annuity provider deducting tax before payments are made. Withdrawals are taxed at the investor’s marginal tax rate and combined with other income sources the investor may have. An IRP5 tax certificate is issued annually for tax filing purposes. Keep in mind that investors may benefit from age-related rebates or exemptions, Investors may benefit from age-related rebates or exemptions, such as the primary, secondary, or tertiary rebates, which can help reduce the overall tax liability.
Can I transfer my living annuity to a different investment platform?
Yes, you are able to transfer your living annuity to a different investment platform through Section 37 of the Pension Funds Act. This process is tax-free provided that the funds remain within the retirement system and are transferred to another registered living annuity and that the withdrawal rules remain the same. Note, however, that some providers may charge administration fees or penalties, so it’s important to review costs beforehand.
Can I change my living annuity into a life annuity?
Yes, you are able to convert your living annuity into a life annuity but keep in mind that this is an irreversible decision. While the conversion is tax-free and provides a guaranteed income for life, note that the investor effectively loses control over the investment decisions as all investment and inflationary risks are carried by the insurer.
Can I withdraw my living annuity?
An investor can make a full cash withdrawal from a living annuity when the fund value falls below R125,000. This typically happens when the annuity has been significantly drawn down or if market performance reduces its value. Note that the lump sum withdrawal will be subject to withdrawal tax according to the SARS retirement lump sum tax tables, and any previous retirement fund withdrawals will be considered when calculating the tax liability.
What happens to my investment when I die?
On the death of the annuitant, the remaining funds are paid to the nominated beneficiaries who can elect to either withdraw the funds as a lump sum, subject to tax, or continue receiving income from the living annuity while maintaining the same withdrawal structure. The annuitant’s spouse can choose to continue receiving payments, convert the remaining funds into their own living annuity, or purchase a life annuity. The funds held in a living annuity do not form part of the deceased’s estate unless no beneficiaries were nominated, in which case the funds will be distributed to the estate.
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