When you retire from your retirement annuity or retirement product, various decisions must be made, for instance:
- Do you want to take your whole provident fund in cash and pay the tax?
- Do you want to take your full one third in cash from your pension plan or retirement annuity and pay the tax on it or do you want to limit the amount in cash and purchase a life annuity or living annuity with the balance?
I would like to bring a few facts to the attention of life annuity and living annuity owners. I have encountered many clients who have totally misunderstood what happens to their annuities when they pass away, and I hope that these notes can clear some of them up.
I have now encountered many clients who were under the impression that living annuities are pension products. This can be attributed to the fact that a monthly “pension” or annuity is paid. They are then under the impression that the proceeds will automatically be paid to their spouse or dependents as it would be under the Pension Funds Act.
This is however not the case. A living annuity is a life insurance product. If you have not appointed a beneficiary or your beneficiary has passed away before you and you have not updated your beneficiary nominations, it can cause a huge problem when you pass away. If there is no beneficiary appointed, the proceeds will be taxed in your name as though you are retiring, and the balance will be paid into your estate to be distributed to your beneficiaries named in your will. The amount will attract a 3.5% executor’s fee as well and will be tied down in your estate until your estate is finalised. This can create a catastrophe for your spouse or other dependents and create a liquidity shortage for your dependents.
As an example: You took a lump sum of R1 050 000 from your retirement fund when you retired and invested the balance in a living annuity. At the time when you pass away, you have R3 000 000 left in your living annuity. If it is paid to your estate or even paid out in cash to your beneficiary, the tax thereon will be 36% or R 1 080 000. This is a huge loss of capital. If your beneficiaries are named in the living annuity and they transfer the proceeds to a new living annuity in their name it will not be taxed.
Please make a point of reviewing your beneficiaries on your living annuity and please discuss the implications there off with your beneficiaries.
Just a few interesting facts about a life annuity, which is completely different to the above. If you take out a life annuity where the income is guaranteed for life and there is no guarantee period or joint life, the lump sum will not be repaid. For example, if you paid R3 000 000 for your life annuity and there is no guarantee and no joint life, and you pass away after one year, the R3 000 000 will not be repaid to your estate or dependants.
A life annuity can have a guarantee period of 10 years or 20 years depending on the option you take. This guarantee does not relate to your income, your income is guaranteed for life. It relates to the income that your beneficiaries will receive. So as an example: If you have a 10-year guarantee on your life annuity and you pass away after seven years, your beneficiary will receive the income for the
remaining three years of the guarantee. Thereafter the income will stop and no further payments will be made.
If you take out a joint life annuity on your life and your spouse’s life, the income will be automatically guaranteed for life for both of you. If you take a joint-life annuity with a 20-year guarantee and you pass away after 10 years and your spouse passes away five years later, your beneficiaries will receive the income for the remaining five years. If the last surviving spouse passes away after 21 years, the beneficiaries will get nothing.
I hope that this article will help the reader to understand the end process of a life or living annuity better. The decisions made, when you invest your funds into a living annuity or buy a life annuity are extremely important and the advice of a suitably qualified advisor is of great value.