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.
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.
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. 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 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 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.
Financial success starts with good saving habits. Our Financial Experts have been unpacking and providing practical advice on the best ways to preserve YOUR financial freedom. Contact our Financial Advisors to ensure that you are receiving Shariah-Compliant Finance advice.
Anglowealth is an Authorized Financial Service Provider (FSP Number: 46755)