Leaving your living annuity to beneficiaries

A living annuity is a retirement investment vehicle that works by providing the retiree with an income through the retirement years. The annuity is funded by a lump sum amount, which is transferred to the living annuity from a pension/provident/preservation fund or a retirement annuity upon retirement. You select the underlying investment portfolio you wish to invest in as well as your annual drawdown rate, depending on your financial needs and current market conditions.

You should then also select a nominated beneficiary or beneficiaries for your living annuity, as it does not form part of your estate and can be passed on to beneficiaries without incurring capital gains tax or estate duty (one of the best features of a living annuity). This article will look at living annuities in more detail, as well as discuss how living annuities can be bequeathed to beneficiaries. For more info on living annuities, check out our living annuity FAQ page.

Understanding living annuities  

Living annuities are flexible retirement investment vehicles that allow you to invest your retirement funds and then draw a regular income from these savings. They are long-term investments, which usually span 20 or even 30 years. You can choose the underlying investment portfolios your money will be invested in, and also your annual drawdown rate, giving you flexibility and control, and potentially giving your money the chance to grow.  

The underlying portfolios you select typically contain a mix of equity, bonds, real estate and cash, both offshore and local, depending on your risk tolerance and time horizon. Your annual drawdown rate can be reviewed each year, and if needed, it can be adjusted each year prior to the investments’ anniversary. When structuring and planning your living annuity, or when reviewing it, it’s important to make use of the Golden Equation. This is as follows: ​Investment Returns ≥ Inflation Rate + Fees + Income Drawdown​.   

Essentially, you need to make sure that your investment returns are equal to or greater than the sum of the inflation rate, fees and your income drawdown. This is to ensure that your living annuity is sustainable and able to provide you with an income throughout your retirement years. You don’t have control over inflation, but this factor still plays a big role in the equation. As such, you want to use your asset allocation and aim to maximise your investment returns while keeping fees as low as possible and choosing a sustainable drawdown rate.   

You may choose a drawdown rate of between 2.5% and 17.5% per annum. It is generally agreed that a drawdown rate of around 4% is sustainable. If your drawdown rate is higher than this, then the risk of your capital depleting quickly is much higher.  If your investment returns are not equal to or greater than these 3 factors, then you run the risk of your funds being depleted and not being able to provide you with an income through your retirement. Here is a handy link to a living annuity calculator to help you calculate how much income you may receive. 

Nomination of beneficiaries  

It’s important that you nominate beneficiaries when setting up your living annuity. These nominated beneficiaries receive the funds in the living annuity upon your death. The nominated beneficiary can also pass on any residual value left in the living annuity on to their nominated beneficiaries. You must review and update your beneficiaries regularly to ensure that the beneficiaries you wish to receive your fund are indeed reflected.   

If you do not have a nominated beneficiary or beneficiaries, then the funds may go to your deceased estate and will be paid out according to your testamentary wishes. This can be a lengthy and costly process. These delays may result in spouses or dependents not having income for this period of time. By making sure you have nominated beneficiaries, you can ensure that your living annuity will not be subject to estate duty. Estate duty is levied at 20% for estates of up to R30 million and 25% for estates that are valued at more than R30 million. If you don’t have a nominated beneficiary, the remainder of the living annuity may form a part of your estate and be taxed accordingly.  

Options available to beneficiaries  

The beneficiaries of a living annuity have a few options available to them. These options include:  

• Continuing to receive annuity payments. The beneficiary will be taxed at their marginal tax rate. This is especially useful if, for example, the remaining spouse is in a lower tax bracket. 
• Take a lump sum amount. If you decide to take a tax lump sum, the first R550 000 will be tax-free, and the remainder will be taxed according to the retirement tax tables. As follows, which has been taken from the SARS website as of March 2025:  

• Take a portion as a lump sum amount and transfer the remainder to a living annuity in their own name. The first R550 000 is tax-free, and the remainder is taxed as per the retirement tax tables as above. 

Impact of fees on inherited living annuities 

It’s crucial that you are aware of the fees that are being charged on your living annuity. High fees will erode your retirement savings over time, and this will result in their being less available to leave to your beneficiaries. Fees charged can vary wildly between service providers, and it’s important that you compare providers and the fees that they may charge. 10X investments charge low fees of less than 1%.  

This is very competitive when you look at other service providers that may charge as much as 3% (and in some instances, even more). Low fees allow for more of your returns to be reinvested to compound and grow your capital over time. Therefore, potentially allowing for more residual value to be available for beneficiaries when you pass. If we look at the Golden Equation in this context, ​ Investment Returns ≥ Inflation Rate + Fees + Income Drawdown, we would want to ensure that the fee component is as low as possible, thereby allowing our capital to grow and provide us with an income through our retirement, and aiming to provide an income for our beneficiaries too.   

For example, let’s consider a scenario where we compare 3% in fees to 1%. In both scenarios, let’s assume an investment of R100,000, a return of 12% per annum and an inflation rate of 6% over a period of 30 years to determine how impactful fees can be.  

Scenario One (1% in Fees): After 30 years, your real investment value is equal to R398,578.   

Scenario Two (3% in Fees): After 30 years, your real investment value is equal to R231,004.    

It is clear how higher fees erode your net investment returns over time. In the above example, a small difference of 2% in fees was equal to 167,574 or 42% less. The importance of low fees is clear, as the higher your fees are, the less real money you make. 

Asset allocation and inflation considerations   

Inflation reduces the purchasing power of our living annuity over time. Inflation usually sits at around 5 or 6% in South Africa, and it is something that we can’t change. Given that the drawdown rate is a percentage of our capital, if our capital is being depleted, then the amount of income we receive will also drop. A diversified portfolio that includes a mix of different asset classes is the best way to try and outperform inflation and achieve good returns on your investment. It allows the living annuity to reap the benefits of growth in certain asset classes whilst also mitigating against any downturns in other asset classes. The usual asset classes you would look at are equities, bonds, real estate and cash. Depending on your risk tolerance, financial goals and timelines at play, you would structure your portfolio accordingly.   

As a living annuity is considered a long-term investment, an investor should look to include a percentage of equities in the portfolio, as equities have been shown to outperform inflation over the long term. They are also more volatile, but you can generally expect better returns over the long run. If your timelines are a bit shorter, you might be a bit more conservative and look to include more bonds and cash in your portfolio. Bonds usually yield lower returns but are more stable. It’s also wise to consider including some offshore exposure in your portfolio. This helps to protect your capital against any local market risk and Rand depreciation, as well as taking advantage of international market growth.  

There is no cap on the percentage of your living annuity that can be invested offshore, so if you wish, you are able to invest 100% of your living annuity offshore. Beneficiaries are able to change the underlying portfolios of their inherited living annuity in order to match better with their financial goals, risk tolerance and time horizons. Once again, as a beneficiary, you would need to look at the Golden Equation to ensure that you are balancing your investment returns against fees, your drawdown rate and the inflation rate.  

It may be useful to speak to our investment experts at 10X when looking at which underlying portfolios to choose for your living annuity, as we are more than happy to discuss your options. 10X has a wide range of funds on offer, each offering a different mix of underlying assets. The stated aim of our flagship Your Future Fund is to beat inflation by 5.5%. So if you have any doubts about asset allocation, get in touch with 10X. 

Index tracking vs active management 

Living annuities may be either passively or actively managed. When we look at index tracking, this is typically a more passive investment strategy: in other words, fund managers aren’t trading often, trying to pick winning stocks. Rather, the idea is that the performance of a particular index - such as the S&P 500 - is ‘tracked’ to try and match the returns. This is done by buying the same security and in the same numbers as that particular index. The benefits of this type of investment strategy are that it is cheaper (as there is less research overhead and trading costs incurred) and data suggests that index trackers outperform active managers more often than not. 10X investments make use of index tracking; this is a great mechanism to keep fees on the lower side of the spectrum.  

Active management is where fund managers research and analyse various securities in order to decide which will do well and which to buy or sell. They do come with higher fees, though, due to the amount of research and trading that goes into active management. The aim here is to beat an index rather than match it. If the fund doesn’t do well and higher fees are being charged, this can have a substantial negative effect on returns.  

Sustainable use of a living annuity 

You would want to ensure that your living annuity is sustainable. To do this, you need to look at a few areas: 

Sustainable withdrawals: You would ideally want to select a drawdown rate of around 4% per annum to ensure the sustainability of your capital. Keep in mind that this is dependent on your specific financial circumstances.  

Low fees: Ensure that you use a service provider who is transparent with their fees and also charges low fees in order to help preserve your capital. 

Inflation: Diversifying the portfolio appropriately across the various asset classes to ensure that you can reap the benefits of growth in certain classes and mitigate against losses that may occur in other asset classes.  

Tax: It’s possible that as a beneficiary of a living annuity, you may have other income streams. It’s important to use your living annuity tax-efficiently. The extra income that you are now receiving may push you up into a higher tax bracket. By limiting withdrawals, you can help to minimise the tax that you pay and stay in a lower tax bracket.  

Plan ahead when leaving your living annuity to beneficiaries  

When it comes to your living annuity, proper planning is essential. As has been discussed in this article, it’s vital to ensure that you have a nominated beneficiary for your living annuity so that the residual amount in your living annuity may be passed on to this beneficiary instead of forming part of your estate. This could result in delays as well as additional costs. It is wise to regularly review your living annuity drawdown rates and portfolios to ensure that they still match your financial needs.  

Fees should also be reviewed regularly to ensure that you are not overpaying, which could result in your capital being depleted quickly. It’s also a good idea to understand the tax tables to ensure that extra income received from an inherited living annuity will not put you in a higher tax bracket and result in you needing to pay more tax. Adherence to the Golden Equation is important in order to maximise the capital and benefits that your beneficiaries will receive.  

If you need help with any of these factors, don’t hesitate to speak to the knowledgeable investment consultants at 10X, who are experienced in these areas and committed to providing you with an excellent level of service.