What is a Living Annuity?

A Living annuity is a financial product that pays you a regular income. You can choose between two types of annuities: a Guaranteed Annuity or a Living Annuity. As a member of a pension, pension preservation or RA fund, you must use at least two-thirds of your fund proceeds AT RETIREMENT to purchase an annuity, once your fund value is more than R247 500. You are not permitted to buy a fixed-term annuity that only pays out for a specific number of years.

As a member of a pension, pension preservation or RA fund, you must use at least two-thirds of your fund proceeds AT RETIREMENT to purchase an annuity, once your fund value is more than 247,500. An annuity is a financial product that pays you a regular income. You can choose between two types of annuities: a Guaranteed Annuity or a Living Annuity. You are not permitted to buy a fixed-term annuity that only pays out for a specific number of years.

In terms of proposed changes to the Income Tax Act, the annuitisation may also apply to provident and provident preservation fund balances from 1 March 2018. This would, however, exclude any “vested rights”. The “vested right” is your provident (preservation) fund balance on 1 March 2018 and subsequent returns on that balance. If you are a provident (preservation) fund member older than 55 on 1 March 2018, your entire fund will remain exempt.

Guaranteed Annuity (GA)

The Guaranteed Annuity (GA) is an insurance product that you purchase from a life assurance company. The life assurer guarantees to pay you a specified monthly pension for the rest of your life. This effectively insures you against longevity risk (the risk that you live longer than expected) as well as investment risk (depleting your capital too soon due to inadequate investment returns).

This pension is paid until you die. The drawback is that your capital dies with you, and no money passes onto your heirs. That is your risk: you (or, rather, your heirs) forfeit your savings in the event that you die sooner than expected unless the contract incorporates a guarantee period or a spousal benefit. To avoid this risk, you can instead choose a living annuity.

Living Annuity (LA)

The Living Annuity (LA) is, in essence, an investment product. It transfers the risk and responsibility of securing an adequate income for life onto your shoulders. In return, you have greater investment and income flexibility and your heirs inherit whatever is left of your capital after your death (ie your capital does not die with you)

With a Living Annuity, you decide how to invest your savings, within the basket of investments offered by your product provider. Unless you have the necessary investment expertise, you should consult a reputable retirement planning tool or financial advisor on the appropriate draw-down rate and asset allocation.

Living Annuities are mainly sold through Lisps (linked-investment service providers). Lisps are essentially administrators who invest your money according to your instructions. They then track the performance of your investments. Lisps do not provide financial advice and you normally have to deal with them through a registered financial adviser.

Some providers, such as 10X Investments, offer their Living Annuity direct to the public. This enables you to sidestep LISPs and – if you choose – advisory fees.

Living Annuity rules

A living annuity can only accept proceeds from a retirement fund or another living annuity. You can add the proceeds from a retirement fund to your existing living annuity. You can transfer your living annuity from one service provider to another but you cannot combine two living annuities into one.  

Every year you must draw a pension from your investment. This so-called draw-down must be at least 2.5% but no more than 17.5% of the annual value of the residual capital at the policy anniversary date. Your draw-down rate can change from year-to-year, but you must make your election before the policy anniversary date. You can choose to receive your income monthly, quarterly, semi-annually or annually.

You can switch a Living Annuity into a Guaranteed Annuity at a later stage (although you cannot do the reverse). You can take out both types of annuities concurrently or purchase a composite annuity (both living and guaranteed) under a single life assurance policy.

Your nominated beneficiaries inherit any residual capital after your death; they can choose to receive a lump sum, an ongoing annuity or an accelerated annuity (paying out over five years). If you do not nominate any beneficiaries, the money will fall into your deceased estate and be subject to your testamentary wishes.

Tax benefits

The transfer to your living annuity is tax-free. You are not taxed on the investment return, instead, you pay income tax on your withdrawals per the normal income tax tables. The income tax is withheld by the annuity provider and paid over to SARS. Your Living Annuity (other than any amounts that relate to retirement fund contributions not claimed for tax) is not subject to Estate Duty. Any residual capital is taxed either per the retirement lump sum or the income tax table (depending on whether beneficiaries choose to receive a lump sum or annuity income).

Costs

Costs are an important consideration with any investment, also for a Living Annuity. These products are potentially very expensive. Most Living Annuities charge initial fees, annual fees, transaction charges and investment management fees (on top of any advice and platform fees you may pay). In total, these charges can be as high as 2.5% pa of your capital. Such high costs accelerate the depletion of your savings.

The 10X Living Annuity charges only one annual investment management fee, at a maximum of 0.86% pa (incl. VAT) of your capital (the fee drops for amounts above R5m).