There is a great deal of misunderstanding surrounding the rather complex world of life and living annuities. Indeed, these products are often confusing and difficult to navigate for the lay person.
Below is a Q&A that seeks to simplify these products and promote a better understanding of their benefits and potential drawbacks…
What is an annuity?
An annuity is an investment that pays out regularly, usually once a month, to provide you with an income.
What is a living annuity?
A living annuity is so called because it does not ‘die’ with you. In other words, what is left can be paid out to your nominated dependents and beneficiaries.
How is a living annuity taxed?
You only pay tax on the income you withdraw, according to the PAYE tables. There is no CGT, Dividend Withholding Tax, or tax on the growth of the investment.
How much income can I withdraw from a living annuity?
You can withdraw an income of between 2.5% and 17.5% of the investment value each year. This income can be revised every year on the anniversary of the investment.
In addition to the income, can I make ad hoc withdrawals?
No, you cannot.
What will happen to the living annuity when I die?
Your nominated beneficiaries will be able to do one of the following:
- Take a lump sum withdrawal or the full investment value as cash. SARS will calculate the tax to be paid on the lump sum
- Remain invested in the living annuity in his/her name. The tax paid on the income stream will be at his/her marginal tax rate.
- Select a combination of the above, namely a lump sum withdrawal and a living annuity in his/her name.
What determines the performance of a living annuity?
The performance of a living annuity is dependent on the growth of the investment funds the lump sum is invested in, and the amount of income taken. This lump sum is usually invested in unit trust portfolios, thereby enabling you to take advantage of the inflation-beating growth of shares. However, this also comes with the associated risks of investing in the stock market. If the shares decline, so will your capital and income.
Is a living annuity subject to estate duty?
No, it is not.
What is a life annuity?
You pay in a lump sum to a life assurance company and in return you are paid a fixed income every month for the rest of your life.
What determines how much money I will get every month from a life annuity?
The annuity will depend on the lump sum invested and the prevailing interest rates. When interest rates are low, the cost of the annuity is higher and the monthly income lower. This income is fixed for the rest of your life.
How do I take inflation into account with a life annuity?
You can choose between different income payment options and thereby take inflation into account.
What happens to my life annuity when I die?
You can select a guarantee period which ensures the annuity is payable for the guarantee period in the event of your death.
If no guarantee period is selected, the life annuity terminates in the event of your death.
Does a life annuity attract estate duty?
No, it does not.
Sourced from Momentum, Glacier and Old Mutual.