When you retire from your pension, provident, preservation, or retirement annuity fund, you must utilize at least two-thirds of your investment to buy an annuity income, which is essentially a pension income that is paid on a regular basis during your retirement years. Many retirees find the available alternatives and accompanying decision-making to be daunting and confusing, especially when many of the decisions are permanent. Before you buy a living annuity, be sure you know exactly what you’re getting into. Here’s what you need to know.
The Long-Term Insurance Act governs living annuities, although unlike life annuities, they are investments tied to unit trusts, cash investments, or share portfolios held in the annuitant’s name. The annuitant is not protected against investment risk or longevity because the living annuity is not an insurance policy. There is no upper age limit for obtaining a living annuity, albeit the earliest you can retire from a retirement fund is age 55, at which point a living annuity structure becomes available.
The annuitant is required to draw a regular income on a monthly, quarterly, or annual basis once the funds have been set up in the living annuity structure, and it is their responsibility to ensure that they do not run out of capital. Because a living annuity is an investment, it is crucial to remember that it provides no guarantee on your capital, which is related to investment performance. As a result, choosing an appropriate investment plan is critical to ensuring consistent cashflow in retirement. Furthermore, while selecting a living annuity, it’s critical to pay close attention to the costs you’ll be charged, as these will have an impact on your capital and drawdown.
Because a living annuity is not governed by the Pension Funds Act, once you have utilized the proceeds of your retirement funds to invest in a living annuity, your funds are no longer subject to the restrictions of Regulation 28. This practically means that you, as an investor, have complete control over the structure of the underlying investment portfolio. This means you may create a portfolio that is completely tailored to your investing goals, risk profile, and time horizon. The asset mix you chose for your underlying investment portfolio will affect your portfolio’s predicted long-term returns as well as the level of volatility you can expect.
If you want to invest 100% of your assets abroad, you can do so, but you’ll need to use a rand-denominated offshore feeder fund because living annuity investors can’t invest directly offshore using foreign-domiciled funds. Although it is crucial to reduce the risks of inflation and outliving your money when constructing your living annuity, living annuities give investors with a greater choice of investment opportunities that can enable them to beat inflation and earn income in their retirement years.
Investors in living annuities must take a yearly income of between 2.5 percent and 17.5 percent of their residual capital, with the option to change the drawdown rate on the policy’s anniversary. Setting a drawdown rate that is sustainable in the long run is crucial, and this is best done with the help of a retirement planning professional. Detailed cashflow estimates will assist in determining the best drawdown amount, keeping in mind that raising your withdrawal rate will make it more difficult for your investment to stay up with inflation over time.
Remember that you cannot access the capital in a living annuity by ad hoc withdrawals throughout your lifetime; instead, you are limited to the annual income you choose, however the market value of your investment at the time of your death will pass to your designated heirs. The sole exception is if your living annuity amount is less than R125 000, in which case a full withdrawal is permitted. Because you won’t be able to take lump-sum withdrawals from your living annuity, you’ll need to set up an emergency fund with discretionary funds.
You are allowed to make further contributions to your investment once you have a living annuity in place, as long as the funds come from an approved retirement fund. If you later decide to retire from a retirement annuity, for example, you can choose to transfer the benefits into an existing living annuity structure.
The funds in a living annuity are not subject to dividends tax, capital gains tax, or income tax, but they will be taxed at your marginal tax rate once you start drawing an income from them.
For a variety of reasons, living annuities are great succession planning instruments. For starters, unlike life annuities, which terminate when the policyholder dies, the assets left over after the annuitant dies can be used to leave a financial legacy for your loved ones. Second, unlike beneficiary nominations for retirement funds, which are governed by Section 37C of the Pension Monies Act, annuitants are free to choose whoever they like as beneficiaries, with the guarantee that individuals named will get the funds in the event of death. Third, if the annuitant has designated a beneficiary, the proceeds of the living annuity will not be included in the estate of the deceased, and so will not be subject to estate duty or executor’s fees. As a result, before purchasing a living annuity, check that your estate is structured to meet the financial needs of your spouse and/or loved ones in the event that you pass away.
Your living annuity beneficiaries have the choice of moving the annuity into their own name or collecting it as a lump amount if you have specified dependents. Finally, keep in mind that your living annuity’s capital is secured from creditors and cannot be seized by a court order. The income from your living annuity, on the other hand, is not protected in the same way.
If you emigrate after establishing your living annuity, keep in mind that you will be unable to transfer your living annuity to another country. The investment will be kept in South Africa, and the revenue must be put into a South African bank account, which you can then convert into any foreign currency.
Living annuities are particularly flexible investments because they allow investors to switch local investing platforms and underlying strategies without incurring any tax or expense consequences.
If annuitants choose to purchase a life annuity with their living annuity money at a later date, legislation allows them to do so. A life annuity, on the other hand, cannot be converted to a living annuity after it has been established.
It’s unlikely that you’ll buy a living annuity more than once in your life, so it’s critical to get it properly the first time. Consider getting the guidance of an experienced, fee-based financial advisor rather than attempting to negotiate this complex area of retirement planning on your own.
What is the difference between a living annuity and retirement annuity?
BizNews editor Jackie Cameron chatted with independent financial planner Dawn Ridler of Kerenga Wealth Ecology in Johannesburg and investment specialists Albert Coetzee and Marc Lindley of Ninety One Investment Platform in our Friday Finance webinar (see full webinar below).
The three guests discussed the major distinctions between a retirement annuity (RA) and a living annuity (LA) (LA).
- You can purchase a retirement annuity right now, but you won’t be able to touch it. “The only time you can get your money out is if you die before you’re 55, or if you’re sick,” Coetzee adds.
- You have the option of switching to a living annuity when you reach the age of 55.
- A retirement annuity is a type of savings plan. The money you put into your RA can be changed to a LA once you retire. “I begin to draw down on my savings, and it gives me with an income on whatever schedule I require, whether it’s monthly, quarterly, semi-annually, or even annually,” Lindley explains.
- The Pension Funds Act governs RA and imposes specific limitations. The Long Term Insurance Act governs asset exposure in LA, and it has its own set of laws.
- You can’t take a LA with you if you emigrate, but you can with a RA. Coetzee continues, “You can cash it in, pay the taxes, and take the money with you when you emigrate.”
- According to Dawn Ridler, you should carefully consider the tax consequences of a LA.
- If you’re emigrating, it’s a good idea to hire someone who is experienced with tax laws in both countries to help you.
- What to think about before deciding whether to invest in a living annuity or a guaranteed annuity for retirement
- ANC’s idea to drain your funds is called “prescribed assets.” But don’t worry, Dawn Ridler is here to help.
- Did you have Covid? Life insurance and healthcare will be more expensive, as well as money-saving advice Dawn Ridler
Visit our BizNews channel on YouTube to watch the complete discussion or to see all of our previous Finance Friday webinars.
Whats a living annuity?
Once your fund value exceeds $247,500, you must utilize at least two-thirds of your fund earnings AT RETIREMENT to purchase an annuity as a member of a pension, pension preservation, or RA fund. An annuity is a financial instrument that pays you a set amount of money on a monthly basis. A Guaranteed Annuity or a Living Annuity are the two types of annuities available. You are not allowed to purchase a fixed-term annuity that pays out for a certain number of years.
Annuitization may apply to provident and provident preservation fund balances from 1 March 2018 as a result of planned revisions to the Income Tax Act. This, however, would rule out any “Irrevocable rights.” ‘The’ “Your provident (preservation) fund balance on March 1, 2018 and subsequent returns on that balance are referred to as “vested right.” If you are a member of a provident (preservation) fund who is 55 or older on March 1, 2018, your whole fund will be excluded.
A Guaranteed Annuity (GA) is a type of insurance that you can buy from a life insurance company. For the rest of your life, the life insurer promises to pay you a certain monthly pension. This effectively protects you from both longevity risk (the possibility of living longer than planned) and investment risk (depleting your capital too soon due to inadequate investment returns).
This pension will be paid till you pass away. The disadvantage is that your capital will die with you, leaving no money for your heirs. That is your risk: unless the contract includes a guarantee period or a spousal benefit, you (or rather, your heirs) will lose your money if you die sooner than intended. You can prevent this danger by opting for a living annuity.
The Living Annuity (LA) is essentially a financial investment. It places the danger and duty of securing a sufficient income for the rest of your life on your shoulders. You get more investment and income options in exchange, and your heirs inherit whatever is left of your estate after you die (ie your capital does not die with you)
With a Living Annuity, you choose how to invest your money from a pool of options provided by your product provider. You should consult a credible retirement planning tool or a financial counselor on the right draw-down rate and asset allocation unless you have the relevant investment experience.
Lisps are primarily used to sell living annuities (linked-investment service providers). Lisps are simply administrators who manage your money and invest it according to your wishes. The performance of your investments is then monitored by them. Lisps don’t give financial advice, so you’ll have to deal with them through a licensed financial adviser.
Some companies, such as 10X Investments, sell Living Annuities directly to the general public. This allows you to avoid LISPs and, if desired, advisory costs.
Living Annuity Rules: Only a retirement fund or another living annuity can be used to fund a living annuity. You can supplement your existing living annuity with funds from a retirement fund. Your living annuity can be transferred from one service provider to another, but you can’t combine two living annuities into one.
You must take a pension from your investment every year. The annual value of the residual capital at the policy anniversary date must be at least 2.5 percent but no more than 17.5 percent of the annual value of the residual capital. You can adjust your draw-down rate from year to year, but you must make your decision before the policy anniversary date. You have the option of getting paid monthly, quarterly, semi-annually, or annually.
Later on, you can convert a Living Annuity to a Guaranteed Annuity (although you cannot do the reverse). Both forms of annuities can be purchased at the same time, or a composite annuity (both living and guaranteed) can be purchased under a single life assurance insurance.
After your death, your specified beneficiaries inherit any remaining capital; they have the option of receiving a lump payment, an ongoing annuity, or an accelerated annuity (paying out over five years). If no beneficiaries are named, the money will go to your deceased estate and be subject to your testamentary instructions.
Benefits of the transfer to your living annuity: The transfer to your living annuity is tax-free. You do not pay income tax on the investment return; instead, you pay income tax on your withdrawals according to standard tax tables. The annuity provider withholds income tax and sends it to SARS. Your Living Annuity is not subject to Estate Duty (save for payments related to unclaimed retirement fund contributions). Any remaining capital is taxed either as a lump sum or according to the income tax table (depending on whether beneficiaries choose to receive a lump sum or annuity income).
Costs play a crucial role in any investment, including a Living Annuity. These items have the potential to be quite costly. Initial, yearly, transaction, and investment management fees are all charged by most Living Annuities (on top of any advice and platform fees you may pay). These fees might sum up to 2.5 percent of your money per year. The depletion of your money is accelerated by such hefty costs.
The 10X Living Annuity charges only one yearly investment management fee, which is capped at 0.86 percent of your capital per year (incl. VAT) (the fee drops for amounts above R5m).
Can a living annuity be cashed in South Africa?
I’m sorry to hear that you’re sick and that the added burden of repaying your bond is making things worse.
The Long-Term Insurance Act, not the Pension Funds Act, governs living annuities. The latter allows the fund’s trustees to use some discretion in specific conditions, but this discretion is not available in the case of a living annuity. Your beneficiary designation on a retirement fund, for example, is a guide to the trustees, whereas your beneficiary nomination on a living annuity is binding.
The only method to receive funds out of a living annuity is through the annual withdrawal, even if the investment’s value is larger than the authorized amount (as it is in your instance).
You have the option of increasing your income withdrawal to the maximum amount permitted – 17.5 percent of the value on the anniversary date.
However, it appears that you’re already near to the maximum, and because living annuity income is subject to income tax, increasing your income rate further may result in you paying tax at a higher marginal rate.
You are correct in saying that no one could have predicted Covid and its influence on financial markets. However, drawing money at the pace you appear to be receiving so soon after retirement is not a viable option.
In most periods of history, drawing 17.5 percent or less from your capital caused the value to begin to decline quite fast. So, while the market downturn and the impact of Covid-19 would have certainly made things worse for you, the reality is that you were probably already living beyond your means, and we would have expected your pension income to start declining relatively quickly, even if the events of the last 18 months had not occurred.
The order in which your investments return in the first few years of retirement has a significant impact on how long your capital will endure and how much you can afford to draw as an annual income. Unfortunately, we can’t predict how the refunds will be organized in advance. In the midst of this uncertainty, the ‘4% rule’ gives a broad guidance. If you want to be pretty certain that you’ll be able to draw an income from your retirement savings for the rest of your life, and that you’ll be able to grow that income by inflation every year, you shouldn’t take more than 4% to 5% of the capital as an income in your first year of retirement.
When you retired, you put around R2.7 million into living annuities. Using the 4% criterion, your first annual income should have been no more than R108 000 or R135 000.
In general, we advise clients to settle their obligations as much as possible when they retire. At the time, your outstanding bond was R350 000. To get a lump sum of R350 000, you would have needed to take out an extra R427 000 in cash (assuming lump sum tax at 18 percent ). This would have left you with a little more than R2.2 million to invest in living annuities. Using the 4% criterion once more, a sustainable starting income would be between R88 000 and R110 000 per year.
Even if your bond had been returned, you would have had to draw more than that as a starting income, and it is reasonable to suppose that your income would have started to decline at some time. Of course, if you know ahead of time that you will not live long, you can probably afford to take more than 4% to 5% of the value as a starting income, but not much more.
I would recommend that you seek for ways to save costs in order to lengthen the life of your living annuity capital.
Are you able to sell your property and free up some cash by relocating to a less expensive area or renting rather than buying?
You might alternatively use the money from your living annuity to buy a ‘classic’ guaranteed annuity, which is usually marketed through a life insurance company. This form of annuity is likely to provide you with a significantly lower income than your present living annuity, but the income would be guaranteed for the rest of your life. Having more certainty will ideally reduce your stress and improve your overall quality of life.
Your first annuity income would be determined by your life expectancy; the longer your life expectancy, the lower your initial annuity income. Life insurance companies typically consider gender and age when determining life expectancy, but we are aware of one life insurance company that has recently begun to consider health status and has begun to grant higher initial incomes to people whose life expectancy is likely to be reduced due to health concerns. This could be advantageous to you.
The solution, like other parts of financial planning, isn’t simple and should be explored with a professional financial planner who practices holistic planning, which considers all aspects of your life.
Can you transfer a living annuity?
Is it possible to transfer a living annuity to a different administrator, and if so, what are the costs? Tracy Jensen was mentioned in the Personal Finance section of The Star (8 March) in a story concerning the risks of living annuities, and she was referring to the impact costs have on investing funds. What kind of prices might one expect to pay? R5 063 is my quarterly fee on capital of R2.4 million (excluding VAT). I’d prefer to stay anonymous if you post my inquiry on your website. I eagerly await your response.
Answer:
You’d have to examine your T&Cs (both for the fund you’re leaving and the one you’re joining) for any cost implications; some funds charge initial admin and advise fees (which you certainly don’t want to repeat). You should also avoid paying a third-party broker fee. Some funds do not levy such charges (eg 10X, once our living annuity is up and running, within the next few months).
Your quarterly fee of R5 063 on R2,4 million in capital translates to an annual rate of roughly 0.84 percent plus VAT, which is fine as long as the fee (absolute amount) declines according to your capital and there are no further fees that you are unaware of.
Can you add money to a living annuity?
The purchase of a living annuity signals the move from saving for retirement to drawing on those savings. It’s a decision you can’t afford to do wrong, so think about it carefully – preferably with the advice of a professional retirement advisor. In this post, we answer some of the most frequently asked questions about living annuities.
A living annuity can be purchased by someone who is retiring from a pension, provident, preservation, or retirement annuity fund. In other words, if you have money in a registered retirement fund, you have the option of purchasing a living annuity. Living annuities are only available for the investment of retirement benefits that are controlled by the Pension Funds Act, therefore you can’t buy one with money from a discretionary investment.
From an administrative standpoint, setting up a living annuity is pretty simple, but there are a few crucial aspects to consider before doing so. To begin, consider whether you want to withdraw up to one-third of your retirement fund in cash or invest the entire amount, keeping in mind the tax implications of a cash withdrawal. You should also consider inflation and longevity risks, keeping in mind that a living annuity is an investment in your name rather than a life annuity, which guarantees a fixed income for the rest of your life. You’ll also need to evaluate your risk tolerance, requirement for investment returns, and how long you need your money to survive while deciding on the best investment composition, asset allocation, and investing platform for your needs.
In terms of an initial lump payment, most investment platforms have a minimum contribution ceiling of between R50 000 and R100 000.
Yes, if the payout comes from another qualified retirement fund, you can make additional contributions.
No, you can’t buy a living annuity if you’re over the age of 65. However, you will not be able to withdraw funds from your retirement account until you reach the age of 55, which means you can buy a living annuity at any time after that.
Yes, if you invest in a living annuity, the insurance is covered by the Long-Term Insurance Act, so your investment is exempt from Regulation 28 of the Pension Funds Act, which restricts offshore exposure. As a result, based on your aims and objectives, you can choose to invest 100 percent of your living annuity assets offshore. Keep in mind, however, that you will need to invest in a rand-denominated offshore feeder fund because you cannot take your money directly offshore in the form of foreign-domiciled funds.
The law allows you to take a pension income from your living annuity that ranges from 2.5 percent to 17.5 percent of the residual capital value per year. Depending on your specific circumstances, you can choose to draw down on a monthly, quarterly, bi-annual, or annual basis, and you can alter your drawdown rates every year on the anniversary date of the annuity.
All growth, including interest income, dividend income, and capital gains, is tax-free once you’ve invested in a living annuity.
Any income withdrawn from your living annuity that exceeds the tax threshold is subject to the regular tax tables.
Yes, you can transfer your living annuity to another investing platform and to a new investment plan without incurring any tax consequences or incurring any additional costs.
Yes, you can convert your living annuity to a life annuity under the law, but not the other way around. This is due to the fact that a life annuity is an insurance policy acquired using the money from your living annuity.
If the value of your living annuity is less than R50 000, you can withdraw the full value of your investment if you took a cash withdrawal at retirement. If the fund value is less than R75 000, you can withdraw the entire amount from your living annuity if you did not make a withdrawal when you retired.
The pension interest is zero once you’ve retired from a retirement fund and invested in a living annuity, and your spouse has no claim to the money in your living annuity. In the case of CM versus EM Case No: 1086/2018, the Supreme Court of Appeal considered whether or not living annuities are considered part of a spouse’s assets for the purposes of determining the accrual. The court distinguished between (a) the capital invested in the living annuities and (b) the right to receive a regular annuity payment from the insurer based on the capital value of the underlying investment in determining whether the living annuities held by the husband were part of his estate for accrual purposes. The court’s decision confirmed the current view that the annuity’s capital share is reflected on the insurer’s balance sheet and so belongs to the insurer. As a result, the annuitant’s contractual entitlement to receive a regular payment from the insurer is limited, and the capital value cannot be considered when calculating the accrual. In the case of the annuitant’s right to receive regular payments from the insurer, the court determined that the right to these payments was an asset in the annuitant’s estate and so could be considered when calculating the accrual. The trial court has been asked to determine how the value of this right should be calculated.
If you are declared bankrupt, a court order cannot be used to seize the capital in your living annuity. Any income from your living annuity, on the other hand, is not protected and may be seized by your creditors.
When you die, any residual capital in your living annuity will pass to your specified beneficiaries without being subject to estate tax. This makes living annuities a particularly appealing estate planning option since they provide your loved ones with practically immediate access to the investment’s cash and income. Your beneficiaries have the option of withdrawing all or part of the capital, which will be taxed according to the retirement tax table. Alternatively, they can transfer their portion to a new living annuity in their own name, where they can change the drawing rates and underlying investment to suit their needs.
Long-term contracts
Annuities are long-term contracts that last anywhere from three to twenty years, and they come with penalties if you violate them. Annuities typically allow for penalty-free withdrawals. Penalties will be imposed if an annuitant withdraws more than the permissible amount.
Can you split a living annuity?
I have approximately 5 or 6 separate retirement annuities that I will have to (or not)consolidate in the not-too-distant future in order to purchase living annuities. Is it possible to liquidate them one at a time and pay each one into one, two, or three different living annuities, or does it have to happen all at once? Is it possible for me to own living annuities from a variety of providers? When will 10X accept investments in living annuities? Warm Regards Grawe, M.
Mr. Grawe, Mr. Grawe, Mr. Grawe, Mr. Grawe
You have the option of paying each of your retirement annuities into a different living annuity with a different provider, paying them all into the same living annuity at the same time, or adding them to the same living annuity one by one when you withdraw from your retirement annuities.
Because you can’t split your living annuity once you’ve pooled your funds, having numerous annuities gives you some freedom. However, you will be double your administrative costs and possibly duplicating certain costs. It may force you to pay additional tax at the end of the year because each living annuity provider will tax you as if the money they pay is your sole source of income. Minimum amount provisions in annuity contracts (e.g. R750 000 at 10X) may force you to merge one or two of your retirement annuities to meet the maximum. The fees for the 10X Living Annuity are on a sliding scale (the rate reduces below R5 million), thus consolidating the funds makes sense.
How is a living annuity taxed in South Africa?
When you retire from your retirement fund, the Coronation Living Annuity pays you a regular income (including retirement annuity, pension, provident or preservation funds). While there is no tax on investment gains in a living annuity, any income received is taxed according to standard tax tables.
The Coronation unit trust funds can be used to build an appropriate investment portfolio. The Coronation Capital Plus Fund, which has a moderate risk profile, and the Coronation Balanced Defensive Fund, which has a reduced risk profile, are designed for retired investors who need to combine their immediate income demands with the desire for long-term growth.
Investors in living annuities are not currently subject to Regulation 28 of the Pension Funds Act, which means they are not subject to the same investing restrictions as those who invest in a Retirement Annuity. Current law mandates a minimum yearly income withdrawal of 2.5 percent and a maximum annual income withdrawal of 17.5 percent of the Living Annuity’s value.
The Coronation Living Annuity is adaptable, affordable, and transparent. It’s meant to give you the freedom to adjust your post-retirement income level annually and/or alter investment options as your circumstances change. We don’t charge any setup costs or annual admin expenses. The only costs that must be paid are the annual management fees for the underlying unit trust funds that the investor has chosen.
What happens to a living annuity on death?
Retirement plans are complicated, and figuring out what happens to your money once you die can be difficult. The nature of the product, the applicable legislation, and the intent of the retirement fund member all influence how benefits are distributed. When you die, the following happens to your retirement fund benefits:
The Pension Funds Act regulates all pre-retirement products, including pension, provident, preservation, and retirement annuity assets, and Section 37C of the Act governs the distribution of these funds in the case of a member’s death before formal retirement. This provision requires retirement fund trustees to guarantee that a member’s death benefits are divided fairly and equally among their financial dependants and/or nominees, which means that a member’s nominated beneficiaries may not get the entire death benefit. This is because, in the event of a member’s death, the member’s death benefits must be utilized to provide for the member’s surviving spouse, children, and other financial dependants.
Because retirement fund death benefits are paid directly to the member’s beneficiaries and/or nominees, they are not included in the deceased’s estate and are therefore exempt from estate duty.
When a member dies before reaching retirement age, the retirement fund trustees must track down the member’s heirs and distribute the death benefit according to their financial needs. The beneficiaries and/or nominees may opt to receive the death benefit in one of the following ways after the beneficiaries and/or nominees have been identified and the death benefit has been apportioned:
Option 1: The beneficiary can receive a taxable cash lump amount, with the first R500 000 being tax-free, assuming no earlier lump sums were received. The balance will be taxed on a sliding scale between 18 and 36 percent in the hands of the deceased.
Option 2: The recipient may use the capital to acquire a life or living annuity; however, while no tax will be paid when the policy is purchased, the annuity income will be taxed in the beneficiary’s hands.
Option 3: Finally, the beneficiary can choose to use a combination of the previous options.
Whether a retirement fund member has no financial dependants and no beneficiary designation, the fund’s trustees must wait 12 months to see if any unidentified dependants come forward, failing which the benefit will be placed into the deceased estate.
A life annuity is an insurance-based product that provides a guaranteed monthly income until the annuitant’s death. It is, thus, a life policy that terminates when the policyholder dies. When an annuitant dies, the insurer ceases paying the monthly income, and the policy effectively dies with the annuitant, leaving no capital payable to the estate of the deceased.
In the case of a joint life annuity, the insurer continues to pay an annuity, or a percentage of it, until the death of the second spouse (or second life assured), at which point the insurer ceases to pay the annuity and retains all capital. The value of the life annuity is excluded from the dead estate in both cases.
In the event of a fixed-term life annuity, when the annuitant guarantees their annuity income for a set amount of time, such as 10 years, the method is slightly different. If the annuitant dies before the term ends, the remaining annuity income, which is effectively a life insurance, will be regarded deemed property in the annuitant’s deceased estate and may be subject to estate duties.
In most cases, when an annuitant dies, the insurer will capitalize future annuity payments and pay the proceeds to the deceased’s estate. The estate’s executor will distribute the funds according to the deceased’s will or, if that isn’t possible, according to the statutes of intestate succession.
A living annuity is a type of investment that is held in the annuitant’s name. Despite the fact that they are referred to as “policies,” living annuities are not insurance-based products. The annuitant is the owner of the investment and bears all investment and longevity risk. Living annuities give annuitants complete investing flexibility across a variety of investment options, as well as the ability to establish an annual withdrawal rate that corresponds to their income needs. The distribution of living annuity benefits is not governed by Section 37C since living annuities issued in the name of the investor are not covered by the Pension Funds Act.
As a result, the owner of a living annuity can name beneficiaries for their investments, and the remaining monies in the living annuity will be delivered directly to their beneficiaries within a few days if they die. Where the trust’s beneficiaries are natural persons, the annuitant might name a testamentary or inter vivos trust as beneficiaries of their living annuity.
The monies under a living annuity will bypass the deceased’s estate and will not be subject to executor’s costs if a beneficiary has been named. Unless the dead contributed non-tax-deductible contributions to the retirement fund that was the source of the living annuity, the capital invested in the living annuity will not be liable to estate duty.
If the annuitant does not name a beneficiary, the proceeds will be placed into the deceased’s estate, but they will not be subject to estate duty, subject to the same conditions as before. The executor, on the other hand, has the right to demand a fee based on the asset’s value because they will be in charge of its distribution. A living annuity is particularly appealing as an estate planning tool since the annuitant’s specified beneficiaries are guaranteed to receive their benefit if the annuitant survives.
If a nominated primary beneficiary dies before the annuitant, the annuitant’s share will be proportionately split among the surviving primary beneficiaries. If there are no living primary beneficiaries, alternative beneficiary nominations will get a benefit.
The following are the possibilities open to the recipients of a living annuity:
Option 1: The recipient might choose to receive a cash lump sum, which will be taxed in the deceased’s hands according to the retirement tax tables. When there are several beneficiaries, tax will be levied on the total lump sum payments made to all of them.
Option 2: If a beneficiary elects to transfer the annuity into a compulsory annuity in their own name, no tax will be due. The income payable from the annuity, on the other hand, will be taxed in the beneficiary’s hands at their marginal tax rate.
Option 3: If the beneficiary opts for a combination of a lump-sum withdrawal and a mandatory annuity, the tax rates described in Options 1 and 2 will apply.
Is there estate duty on a living annuity?
524. Estate duty and living annuity
A living annuity is a type of mandatory purchased annuity accessible to members of retirement annuity funds and pension funds who are planning to retire. When the member retires from these funds, he or she must purchase a compulsory annuity with at least two-thirds of the cumulative fund value. When compared to the returns realized by equities listed on the stock exchange, the returns on annuities given by most conventional pension and retirement annuity funds are often quite dismal over the medium to long term. Furthermore, all traditional annuities specify the annuity rate, which is used to compute the amount of the annuity payment that the member will receive each month. The fund value of the annuity part is normally forfeited in favor of the pension or retirement annuity fund, as the case may be, upon the death of the member or his spouse.
The living annuity, on the other hand, eliminates all of the drawbacks associated with traditional annuities. The performance of such an annuity is greatly improved over the medium to long term because it is not dependent on fixed interest investments but rather on a variety of top performing unit trusts. The member can choose an annuity rate between 5% and 20% of the fund value to determine the size of the annuity based on his own circumstances. The unamortised component of the annuity fund may be paid to the specified beneficiaries as an accelerated annuity over five years upon the member’s death, or the annuity payments may be continued for the lifespan of the member’s dependants.
Section 3(3)(a)bis of the Estate Duty Act, No 45 of 1955, deems as property of a deceased any benefit due and payable by a fund on the deceased’s death in excess of the total amount of any contributions proven to the satisfaction of the Commissioner to have been paid by a beneficiary, plus interest at 6% per annum. Any annuities payable by a pension fund or retirement annuity fund as defined in section 1 of the Income Tax Act were excluded from considered property by the proviso to the section. The proviso’s exclusion did not apply to situations in which the fund purchased an annuity in the name of the retiring member from a registered insurer or other institution. In other words, where the pension or retirement annuity fund’s rules allowed the member to choose a compulsory annuity from an outside institution, such as a living annuity, such annuity could not be stated to be paid by the member’s pension or retirement annuity fund. Such annuities were deemed to be the deceased’s property to this extent. As a result, the clause has been changed to relate to annuities “supplied by a fund,” broadening the scope of the proviso. As a result, living annuities will no longer be considered property of dead members and will not be liable to inheritance duty.
