Living Annuity FAQs

Frequently asked questions and the meaning of Living Annuities.

What is a Living Annuity?

A living annuity (LA) is a post-retirement vehicle that provides an income for you at retirement from the proceeds of your retirement funds. It is a flexible investment that allows you to choose the income that you receive as well as use underlying investments (such as unit trusts) to grow and preserve your capital investment.
What are my income options?

Living annuities do not guarantee an income for life. You need to select an income percentage that could sustain you for life. You may select an annual income rate of between 2.5% and 17.5% (subject to current limits set by legislation) of your investment value. This percentage may be adjusted annually on the anniversary date of the investment contract. Income may be paid monthly in arrears, quarterly, half-yearly or yearly in advance. Income may be withdrawn from across all underlying investment options, or a portion of the capital can be allocated to specific funds, from which income is drawn.
What are the benefits of a living annuity?
- You have the option to choose the underlying investments to grow your capital and provide income.
- The flexibility of your choice of income allows you to increase or decrease the income drawdown subject to the ASISA standards.
- At death the investment value is not forfeited, but can continue to be paid out as income or in cash to a nominated beneficiary/ies.
What are the risks involved?
- The income you choose to draw from your living annuity may be too high, causing your capital to reduce over time. This means that your future income could fail to keep pace with inflation or even that you outlive your investment.
- Choosing your own investment portfolio brings inherent risks. Your investment value and returns are not guaranteed and may move up or down. The value of your investment account depends on the market value of the underlying investments. If markets fall or returns are poor then your capital could reduce or fail to keep pace with inflation.
What is a living annuity’s investment term?

This contract is for life. On death, the remaining benefit may be paid to your beneficiaries as an annuity or it can be commuted (i.e. the income can be exchanged for a cash lump sum).
How is a living annuity taxed?

Your annuity income is taxed at your marginal income tax rate and based on the total income you receive. The growth, interest and capital gain earned within the living annuity is exempt from tax.
What happens to the money when I die?

The death benefit from a living annuity is paid out to your nominated beneficiary/ies and can be taken as a lump sum payment, transferred to another living annuity or a combination of both.
What options do my beneficiaries have after my death?
- They can continue with the annuity and receive the income, but be taxed on that income at their marginal tax rate.
- Take out the investment value in cash (subject to retirement tax).
- They can elect to take a combination of a cash withdrawal (subject to retirement tax) and an income option.
What is the governing legislation?

The Retirement Income is regulated by various laws, including the Long-term Insurance Act and the Financial Advisory and Intermediary Services Act and the Income Tax Act. The underlying unit trust funds are regulated by the Collective Investment Schemes Control Act.
How is a living annuity treated on insolvency?

In terms of current legislation, your benefit is protected in the living annuity should you become insolvent.

How do I select the right income drawdown?

When drawing a regular income from your investments, it is important to start with an income that can increase with inflation but does not erode a growing capital base which is necessary to support higher income levels over time. Drawing interest only is not a good starting plan as neither your investment nor your income can adjust with inflation over the longer term.

The table below provides a rough guide as to how long (in years) a R10m Living Annuity can provide an income, before you reach the maximum 17.5% income cap and your income will start to reduce. The table provides different periods depending on different starting incomes and above inflationary returns. The income is assumed to increase by inflation every year.

Monthly income on R10m before tax	Annual Drawdown	0%	1%	2%	3%	4%	5%	6%	7%
R33 333	4.0%	20y	23y	29y	39y	40+y	40+y	40+y	40+y
R35 000	4.2%	18y	22y	26y	35y	40+y	40+y	40+y	40+y
R40 000	4.8%	15y	18y	21y	26y	36y	40+y	40+y	40+y
R45 000	5.4%	13y	15y	17y	21y	27y	40+y	40+y	40+y
R50 000	6.0%	11y	12y	14y	17y	21y	27y	40+y	40+y
R55 000	6.6%	10y	11y	12y	14y	17y	21y	29y	40+y
R60 000	7.2%	8y	9y	10y	12y	14y	17y	21y	32y
R65 000	7.8%	7y	8y	9y	10y	11y	13y	17y	22y
R70 000	8.4%	6y	7y	8y	8y	10y	11y	13y	17y
R75 000	9.0%	5y	6y	7y	7y	8y	9y	11y	13y

The chart below provides an example of for how long your living annuity can provide a regular income before you reach the 17.5% maximum income cap. The chart is modelled around a Living Annuity of R 10mil, providing a monthly income of R 50 000 (increasing by inflation) achieving a return of 4% above inflation.

As seen above, after 21 years, the maximum income cap of 17.5% has been reached after which the maximum allowable income will continue to decrease into the future.

What are the key differences between a retirement annuity and living annuity?

A retirement annuity, pension fund or provident fund are vehicles that are used to save for retirement. A living annuity is an investment vehicle that provides an income in retirement. Current regulations allow investors to convert their retirement annuity, pension fund or preservation fund to a living annuity from the age of 55.

Here is a summary of some of the key difference between a retirement annuity and living annuity:

	RETIREMENT ANNUITY	LIVING ANNUITY
Tax treatment	Capital growth and interest earned is exempt from income tax.	Capital growth and interest earned is exempt from income tax. Income withdrawn is taxed as per normal income tax tables (PAYE).
Income to be drawn	No income can be withdrawn.	Income between 2.5% and 17.5% of the investment balance must be withdrawn. This can be drawn once per year, twice per year, quarterly or monthly.
Offshore investment allowed	Maximum offshore investment of 30% permitted.	No limit to offshore investment permitted. Up to 100% of investment value can be invested offshore.
Beneficiary nomination	Yes	Yes
How beneficiary nomination is handled	Nominated beneficiaries are considered a guideline to the trustees of the fund. The trustees of the fund will determine the dependants of the investor and distribute the balance of the fund at their discretion.	A beneficiary nomination is executed as per the investor’s wishes. There is no determination of dependants or discretion taken by trustees.
Tax treatment on death	Once the trustees of the fund determine the dependants of the investor, the dependants can elect to withdraw their benefit as cash or transfer the benefit to a living annuity in their own names. Any cash lump sum withdrawn will be taxed as per retirement tax tables, up to a maximum rate of 36%. This tax is withheld by SARS.	The nominated beneficiaries can elect to withdraw their benefit as cash or transfer the benefit to a living annuity in their own names. Any cash lump sum withdrawn will be taxed as per retirement tax tables, up to a maximum rate of 36%. This tax is withheld by SARS.

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

Life Annuities provide you with a guaranteed income for the rest of your life (based on the initial amount invested) and are usually dependent on the prevailing interest rates at the time. Inflation risk is a concern, depending on the annuity income escalations selected.

With a Living Annuity, you determine the income that you wish to draw from your investment (annually in advance) and your capital is dependent on the market value of the underlying investments. No capital or income is guaranteed. Income longevity could be a concern, depending on the initial income drawn at retirement.

Here is a summary of some of the key difference between a living annuity and life annuity:

	LIVING ANNUITY	LIFE ANNUITY
General characteristics of the investment	The longevity of capital invested in a living annuity is not guaranteed.	The longevity of the capital is guaranteed.
	The investor needs to draw a minimum of 2.5% p.a. and can draw a maximum of 17.5% p.a. as income.	There are different types of life annuities meaning that your starting income can be different dependent on future escalations.
	The investor can change their income once a year on the anniversary of the investment.	The investor can purchase a life annuity for themselves or for themselves and for a partner to receive income post their passing.
	Longevity of capital is dependent on the income drawn and the underlying investment strategy.	The investor can also guarantee that the income will be paid for a period of time should something happen to them.
Investment Strategies	A living annuity is not regulated by Regulation 28 of the Pension Funds Act. Therefore, a client can invest in a pure Equity fund, an Offshore fund, etc.	When investing into a life annuity, an investor can purchase different future escalations which will impact the starting income. Certain options are highlighted below: Level Income – No increase in income in the future. Fixed Rate Increases – The increase in income in the future is predetermined. Inflation Rate increases – The increase in income in the future is linked to SA Inflation. With Profits Increases – The increase in income in the future is linked to the performance of a pool of assets.
General Tax Implications	All income drawn from a living annuity is taxable in the hands of the investor and PAYE is applicable. There is no tax on the growth of the funds held within a living annuity.	All income paid from a life annuity is taxable in the hands of the investor and PAYE is applicable.
General Tax Implications	All income drawn from a living annuity is taxable in the hands of the investor and PAYE is applicable. There is no tax on the growth of the funds held within a living annuity. A living annuity is not included in the Estate of the deceased, the owner can nominate a beneficiary (Or beneficiaries) who has options with regards to how they wish to access/invest the benefits they are inheriting.	The income from a life annuity ceases on the passing of the investor or the partner (Joint life annuity, ceases on last dying), unless within the guarantee period purchased.
Other	A living annuity can be converted to a life annuity at any point in the future.	Once a life annuity is purchased, it cannot be converted into a living annuity.

Pros of a Life Annuity
- No stock market risk.
- No risk of running out of capital or income decreasing into the future.
- Income can be set with a guarantee period to pay to surviving spouse.
Cons of a Life Annuity
- Capital is forfeited to the insurance company on taking out the life annuity.
- The risk of annual increase in income being less than inflation.
- Interest and bond rates are currently low. Annuity rates are linked to bond rates.
- A Life Annuity does not allow for investing offshore.
What are the disadvantages of a Living Annuity in South Africa?

The main disadvantages of a Living Annuity include exposure to market risk, which can cause fluctuations in your investment value. Unlike a Life Annuity, a Living Annuity doesn’t provide a guaranteed income for life. If withdrawals exceed investment growth, there’s a risk of depleting your funds. Additionally, managing a Living Annuity requires careful planning to ensure it aligns with your long-term retirement goals.
What is the Living Annuity withdrawal rate in South Africa?

In South Africa, Living Annuity withdrawal rates are set between 2.5% and 17.5% of your total annuity value each year, which allows flexibility in choosing your retirement income. The selected rate directly impacts how long your funds will last. A higher rate provides more immediate income but can exhaust the annuity faster, whereas a lower rate is more sustainable, potentially extending your funds for life.
Can you withdraw all your money from a Living Annuity?

No, Living Annuities in South Africa do not allow full withdrawals. Instead, you must select an annual income within the regulated withdrawal range of 2.5% to 17.5% of the total annuity value. This ensures that funds continue to grow while providing steady income. If you need access to a larger sum, consulting a financial advisor for alternative options is recommended.
Can I borrow against my Living Annuity in South Africa?

No, Living Annuities cannot be used as collateral and do not allow for borrowing. They are structured strictly for income generation in retirement, ensuring your retirement savings are preserved and managed under regulated guidelines to maintain their longevity.
Can I split my Living Annuity into multiple accounts?

Existing Living Annuities cannot be split. However, you may set up multiple Living Annuities at retirement by dividing your retirement savings into separate annuities. This strategy can allow flexibility in managing different parts of your retirement income and investments according to individual financial needs.
Can you add additional funds to an existing Living Annuity?

No, South African regulations do not permit adding funds to an existing Living Annuity. If you have additional retirement savings, you would need to set up a new Living Annuity or consider other investment options. Living Annuities are meant to be single-purpose retirement income streams.
How do you calculate Living Annuity income?

Living Annuity income is calculated by selecting a percentage withdrawal rate of your annuity’s total value (between 2.5% and 17.5%). For example, if your annuity is worth R1,000,000 and you choose a 5% withdrawal rate, your annual income will be R50,000. The choice of rate directly affects how long your funds will last.
What are the rules for Living Annuities in South Africa?

The primary rules for Living Annuities in South Africa include an annual withdrawal range of 2.5% to 17.5% of the annuity’s value, tax on withdrawals as regular income, and restrictions on adding new contributions. Additionally, the annuity’s investment growth is essential to ensure long-term sustainability.
Can I withdraw a lump sum from a Living Annuity?

No, Living Annuities do not permit lump-sum withdrawals. You are restricted to an annual withdrawal percentage, ensuring the annuity maintains a steady income stream. If you require a lump sum for a specific need, it may be beneficial to explore other financial products or savings accounts.
Can I buy a Living Annuity with cash in South Africa?

No, Living Annuities are funded through retirement savings like pensions or provident funds. Direct cash contributions from non-retirement savings are not allowed. This structure ensures that the annuity serves solely as a post-retirement income source.
Can I transfer my Living Annuity to another provider?

Yes, Living Annuities in South Africa can be transferred to another provider, offering flexibility if you find better investment options or lower fees elsewhere. Transferring can allow you to choose a provider that better aligns with your retirement and investment strategy.
What happens to my Living Annuity if I emigrate from South Africa?

If you emigrate, you can continue to draw income from your Living Annuity. However, income will still be subject to South African tax regulations. Consulting a financial advisor familiar with international retirement rules may be beneficial to maximize your income after emigration.
Is estate duty applied to a Living Annuity in South Africa?

No, Living Annuities are generally exempt from estate duty in South Africa. However, beneficiaries receiving income from the annuity may be required to pay income tax on those distributions. This structure helps preserve the annuity value for your heirs.
What are the withdrawal limits for a Living Annuity?

The South African withdrawal limits for a Living Annuity range from 2.5% to 17.5% of the annuity’s total value annually. These limits are set to maintain the annuity’s sustainability and protect retirement income over the long term.
Can I add more money to my Living Annuity?

Adding funds to an existing Living Annuity is not permitted in South Africa. If you have additional retirement savings, a separate Living Annuity or alternative investment would need to be set up. This helps keep each annuity focused on its original purpose.
What age can you start a Living Annuity in South Africa?

In South Africa, Living Annuities are generally available at retirement, typically starting from age 55. At this point, retirement savings can be transferred into a Living Annuity to begin generating income.
How much can you withdraw from a Living Annuity in South Africa?

You can withdraw between 2.5% and 17.5% of your Living Annuity’s total value annually, as regulated by South African law. This withdrawal rate allows for flexibility in choosing income while balancing the long-term sustainability of your retirement savings.

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