Living annuity vs life annuity

Once you opt to retire from a retirement savings product, two-thirds of your funds need to be invested into a living or life annuity.

If you have reached retirement (55), the time to draw an income from your retirement savings is now. People who have retired have two options, to purchase either a life or living annuity.

What is an annuity?

Annuities are finance products that pays a regular income at retirement. As a member of a pension, pension preservation or retirement annuity fund, you must use two-thirds of your fund proceeds at retirement to purchase an annuity. Once you elect to retire from a retirement savings product this will now cease to exist, and your two-thirds is then invested into either a living annuity or life annuity.

What is the difference between a living annuity and a life annuity? 

Living annuity: 

A living annuity allows you to select an annual income draw down percentage of between 2.5% and 17.5% per annum. You can select an income frequency of monthly, bi-annual, quarterly or an annual payment. This income percentage can be changed – but only once a year on the anniversary date of the investment. This gives you more flexibility and the ability to draw a higher income if needed.

Life annuity:

A life annuity secures you a pre-determined monthly income for the rest of your life. This product is provided by a life insurance company, where you hand over to the company the lump sum of the retirement saving and they take on the obligation to pay you an income for the rest of your life. The income may be a fixed rand amount, or it might be inflation-linked, or you can add a spouse benefit with a guaranteed payment term.

What happens to the annuity on the death of the annuitant?

Living annuity:

On your death the remaining capital value in a living annuity will be paid to your nominated beneficiaries. Please note that if there are no beneficiaries nominated this will form part of your estate. Your beneficiaries can elect to receive the residual value as a lump sum or as an annuity, or a combination of both.

Life annuity:

On death the life annuity will fall away, as this option does not allow you to nominate a beneficiary. The only thing you can nominate is a spouse benefit or a guaranteed period, where it continues to pay the income until the spouse passes away or until the guaranteed period has ended. The downside of a life annuity is that while your income is guaranteed for the rest of your life, you are unable to elect a beneficiary unless the contract includes a guaranteed period or a spouse benefit.

How is the income from an annuity taxed?

Annuity income is taxable as income as per the investor’s marginal tax rate.

On a living annuity if you change your mind are you able to withdraw what is invested in full?

Unfortunately, you are unable to withdraw a living annuity in full. The only time this will be allowed is if the value that is invested drops below R125 000. This withdrawal will be subject to tax.

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 advise.

Anglowealth is an Authorized Financial Service Provider (FSP Number: 46755)

(Source: Moneyweb, 2020)


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