Understanding Living Annuities

Investing in a living annuity marks the transition from building your retirement savings to accessing regular income from those funds. This is a vital decision that requires thorough planning, ideally with guidance from a qualified financial advisor who specialises in retirement planning.

To help you navigate this important step, I answer some of the most common questions about living annuities below.

Who Qualifies to Buy a Living Annuity?

If you are retiring from a pension fund, provident fund, preservation fund, or retirement annuity, you can opt to purchase a living annuity. This option is only available for retirement savings held in registered retirement funds governed by the Pension Funds Act.

How Do You Set Up a Living Annuity?

Although the setup process is straightforward, there are several important decisions you’ll need to make. One of the first is whether to withdraw a portion of your retirement savings as a cash lump sum (subject to tax) or to invest the full amount into the annuity.

Another key consideration is how to manage the risks of inflation and longevity (outliving your savings), since living annuities do not offer guaranteed lifetime income like life annuities do.

You’ll also need to choose an investment strategy that fits your retirement goals and risk tolerance. Selecting the right investment platform is equally important to ensure your needs are met throughout retirement.

Is There a Minimum Investment Requirement?

The minimum amount needed to open a living annuity usually ranges between R50,000 and R100,000, depending on the investment provider you choose. It’s worth comparing options or speaking to a financial advisor to find the best solution for your retirement plan.

Can You Top Up Your Living Annuity Later?

No, once your living annuity has been set up, you cannot make additional contributions from discretionary savings. Living annuities must be funded directly from a retirement fund at retirement.

However, if you retire from a different retirement fund later, it may be possible to transfer that new lump sum into your existing living annuity – but only if your investment platform allows for consolidation.

Is There an Age Limit for Buying a Living Annuity?

There’s no official upper age limit, but living annuities are typically purchased once you reach retirement age, which in South Africa is generally from 55 onwards.

Can You Invest Offshore Through a Living Annuity?

Yes, you can invest up to 100% of your funds offshore if you wish. That said, these offshore investments must be made via rand-denominated feeder funds rather than directly into foreign accounts. Each platform may have different limits, so it’s worth discussing this with your provider.

However, because you are withdrawing income, being invested 100% offshore will not be sound strategy. I would advise a maximum of 40% offshore exposure depending on the individuals risk profile. 

How Much Income Can You Withdraw?

You can withdraw between 2.5% and 17.5% of your living annuity balance each year. Payments can be made monthly, quarterly, semi-annually, or annually, depending on your preference.

Each year, on your policy anniversary, you can review and adjust your withdrawal rate. Keep in mind that drawing too much too soon can exhaust your savings, so working with an advisor to set a sustainable withdrawal rate is strongly recommended.

Do You Pay Tax on Investment Growth?

No, all investment growth within a living annuity – whether from interest, dividends, or capital gains – is tax-free. This tax-efficient structure helps your savings grow faster over time.

How is the Income Taxed?

The income you withdraw from your living annuity is taxed as part of your personal income. The provider will deduct PAYE (Pay As You Earn) tax before paying you. Each year, you’ll receive an IRP5 tax certificate to help with your tax return.

Depending on your age, you may qualify for tax rebates, which could lower your overall tax bill.

Can You Move Your Living Annuity to Another Provider?

Yes, you can transfer your living annuity to a different platform under Section 37 of the Pension Funds Act. This transfer is tax-free, provided the funds stay within the retirement system.

Can You Convert a Living Annuity to a Life Annuity?

Yes, you can switch your living annuity to a life annuity, which would give you a guaranteed income for life. However, this decision is permanent – you can’t go back to a living annuity once the switch is made.

Since this is a big decision, you should seek professional financial advice to make sure it fits your retirement plan.

Can You Cash Out a Living Annuity?

You can only fully cash out your living annuity if the total value drops below R125,000. This could happen if you’ve been withdrawing at a high rate or if your investments have performed poorly.

If you cash out, the lump sum is taxed according to SARS’s retirement lump sum tax tables, and any previous withdrawals you’ve made from retirement funds will also be considered when calculating your tax.

What Happens to a Living Annuity When You Pass Away?

When you die, any money left in your living annuity is passed on to your nominated beneficiaries. They can either:

            •           Take the money as a lump sum (subject to tax), or

            •           Keep the funds invested in a living annuity and draw an income.

Your spouse can also choose to continue receiving your income, transfer the funds into their own living annuity, or convert it to a life annuity.

If no beneficiaries are listed, the funds will be paid into your estate.

Final Thoughts

A living annuity offers flexibility, but it comes with important responsibilities, from managing your investments to ensuring your withdrawals are sustainable. Working with a trusted financial advisor can help you make the most of your retirement savings while preserving your financial security for years to come.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. For personalised advice tailored to your specific financial situation, please contact us or one of our qualified financial advisers at Corona Financial Services.