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Living annuities: Your questions answered

Choosing a living annuity is a decision you cannot afford to get wrong.

Buying a living annuity marks the transition from saving towards retirement to drawing from your retirement funds. It’s a decision you cannot afford to get wrong and, as such, should be carefully considered – preferably with the help of an independent retirement expert. In this article, we provide answers to common questions that clients have about living annuities.

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 that are regulated by the Pension Funds Act.

How do I go about setting up a living annuity?

Setting up a living annuity is relatively easy from an administrative perspective, but there are a number of key factors that need to be determined before setting one up. Firstly, you will need to decide whether or not to commute up to one-third of your retirement fund in cash or to invest the full amount of your fund, keeping in mind the tax implications of making a cash withdrawal. You will also need to give careful thought to inflation and longevity risks, bearing in mind that a living annuity is an investment in your name and not a life annuity which guarantees an income for life. You will also need to decide on the most appropriate investment composition, asset allocation and the investment platform for your specific needs, while also considering your risk tolerance, need for investment returns and how long you need your money to last.

Are there minimum contribution limits?

Most investment platforms stipulate a minimum contribution limit of between R50 000 and R100 000 in respect of an initial lump sum.

Can I make additional contributions to my living annuity?

Yes, you are able to make additional contributions provided that the benefit is from another approved retirement fund. 

Is there an age limit for purchasing a living annuity?

No, there is no age limit for purchasing a living annuity. However, generally speaking, you will not be permitted to retire from your retirement fund before age 55 which means you have the option of purchasing a living annuity any time from age 55 onwards. 

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.

How much can I draw from my living annuity?

The 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 personal circumstances, and you have the option to adjust your drawdown rates every year on the annuities anniversary date. 

Will I be taxed on my investment gains?

Once you are invested in a living annuity, all growth including interest income, dividend income and capital gains are tax-free. 

How will my drawings be taxed?

Any income withdrawn from your living annuity which exceeds the tax threshold will be taxed according to the normal tax tables.

Can I transfer my living annuity to a different investment platform?

Yes, generally speaking, you can transfer your living annuity to another investment platform and to a different investment strategy with no tax implications and at no additional cost.

Can I change my living annuity into a life annuity?

Yes, the legislation permits you to switch your living annuity to a life annuity, but not vice versa. This is because a life annuity is an insurance policy which is purchased with the capital in your living annuity.

Can I withdraw my living annuity?

If you made a cash withdrawal at retirement, you are permitted to withdraw the full value of your investment if the value of your living annuity is less than R50 000. If you did not make a withdrawal at retirement, you can withdraw the full amount from your living annuity if the fund value is less than R75 000.

What happens to my living annuity if I get divorced?

Once you have retired from a retirement fund and invested in a living annuity, the pension interest is zero and your spouse will have no claim against the money in your living annuity. The issue of whether or not living annuities form part of a spouse’s estate for the purposes of calculating the accrual has recently been put before the Supreme Court of Appeal in the matter of CM vs EM Case No: 1086/2018. In deciding whether the living annuities held by the husband formed part of his estate for purposes of calculating accrual, the court made a distinction between (a) the capital invested in the living annuities and (b) the right to receive a regular annuity payment from the insurer based on the capital value of the underlying investment. In its ruling, the court confirmed the current position that the capital portion of the annuity reflects on the insurer’s balance sheet and therefore belongs to the insurer. As such, the annuitant only has a contractual right to receive a regular payment from the insurer and the capital value cannot be taken into account when determining the accrual. With regard to the annuitant’s right to receive regular payments from the insurer, the court ruled that the right to these payments was an asset in the annuitant’s estate and can therefore be taken into account when determining the accrual. How the value of this right is to be calculated has been sent back to the trial court for determination.

Are the funds in my living annuity protected from my creditors?

The capital in your living annuity may not be attached by means of a court order should you be declared insolvent. However, any income drawn from your living annuity does not enjoy the same protection and may be attached by your creditors.

What happens to my investment when I die?

When you die, any capital remaining in your living annuity will devolve on your nominated beneficiaries without attracting estate duty. This makes living annuities a particularly attractive estate planning tool and gives your loved ones almost immediate access to the capital and income from the investment. Your beneficiaries can choose to make a full or partial withdrawal of the capital, which will be subject to tax as per the retirement tax table. Alternatively, they can choose to have their portion transferred to a new living annuity in their own name and adjust the drawdown rates and underlying investment according to their needs.

ADVISOR PROFILE

Gareth Collier

Crue Invest (Pty) Ltd

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