What is a living annuity?

You may already be aware of the importance of saving for your retirement, but do you know what happens to your funds once you cash out your benefit?

This will primarily happen once you have retired, and your living annuity has kicked in. We outline the basics of living annuities, how much you will receive from them each month, and their tax implications.

Tip: Still looking for the right retirement annuity? Click here to find out more.

How do living annuities work?

Ruvan Grobler, wealth manager at Bovest, says that retirement funds are reinvested in a living annuity fund so that you can draw an income during your retirement.  

“You can either invest the full amount in a living annuity, or you can take a third of your retirement savings in cash, and the rest of the capital can be reinvested in a living annuity,” says Grobler.

He points out that every household has a unique standard of living, and you should consider your monthly expenses as well as inflation when determining how much you will need to receive from your living annuity.  

“You may withdraw an annual income of between 2.5% and 17.5% of the capital in your living annuity, and this can be paid out to you on a monthly, quarterly or annual basis,” says Grobler.

Grobler adds that the capital is exposed to financial markets, in that it is invested in a variety of underlying assets. This means that its value may fluctuate.

It’s also good to know that if you pass away, the remaining funds will be paid as a lump sum, or a regular income, to a beneficiary of your choosing.

What are the tax implications?

Grobler says that your living annuity will be taxed according to your personal income tax rate, which depends on your total income during that period.

“You have a tax-free lifetime limit of R500,000 on a third of your capital, and the rest will be taxed according to the retirement lump sum withdrawal limits, which are set out by SARS,” says Grobler.

Here are the tax brackets that you may fall into:

“As you approach retirement, you should work towards becoming debt-free. This will open up cash flow, and you will be able to contribute more towards your retirement,” says Grobler.

Make sure you have enough saved for your living annuity. Set up your retirement fund today.