What is a living annuity?

An investment-linked living annuity is a financial product used at retirement to invest the savings from your retirement fund that must be used to buy a pension. You can choose the investments and, within limits, the monthly income to draw from those investments.

Living annuities may be provided by insurers which are regulated under the Long Term Insurance Act or provided by registered retirement funds. All living annuities must comply with the definition of living annuity in the Income Tax Act.

When should I use a living annuity?

When you reach retirement, you are obliged to buy an annuity or pension – that is paid monthly or annually - with the following retirement benefits:

Your retirement pot;

Two thirds of your vested pot except where you were a member of a provident fund before 1 March 2021 and you were:

• • Fifty-five years of age on 1 March 2021 (in this case the full vested pot can be taken in cash); or
  • Under 55 years of age on 1 March 2021 and the value of the vested pot up to that date including growth can be taken in cash.

You can use this money to buy a pension using either:

• An investment linked-living annuity;
• A guaranteed life annuity; or
• A hybrid of these two annuities.

The main differences between living annuities and guaranteed annuities are:

• Living annuities allow you to choose the investments that provide the pension and within certain limits, the income you draw each month. If you choose a guaranteed annuity, the life insurer will tell you what pension you will receive, depending on how you want to increase it and whether you include a pension for your spouse.
  
  
• Living annuities allow you to leave any remaining balance to a beneficiary or beneficiaries when you die. Guaranteed annuities either cease on death, or on the death of a surviving spouse or at the end of a guaranteed period, depending on the choice you make when you take it out.
  
  

Where can I buy a living annuity?

A living annuity must be provided by a licensed insurance company or your retirement fund. Many are offered on the investment platforms or linked investment services providers or administered by one. Others are offered directly by insurers.

Those offered on investment platforms typically allow you to choose the underlying investments from those available on the platform.

Your retirement fund can also provide what is known as an in-fund living annuity and there are some differences between these in-fund living annuities and those provided by financial services companies with money transferred out of your retirement fund.

What happens after you invest?

After you have invested your retirement savings in a living annuity:

You can draw an income.

You are entitled to draw an income monthly, quarterly, six monthly or annually.

The amount you draw over the year must be between 2.5 percent and 17.5 percent of the value of the investments in the living annuity at inception and each year on the anniversary of the policy. This is in terms of the definition of a living annuity in the Income Tax Act.

The rate you draw as an income is known as the drawdown rate.

You are entitled to change your drawdown rate once a year on the anniversary of your start date.

If you reach the maximum drawdown rate of 17.5 percent, your income will most likely decline in real (after-inflation) terms each year.

You need to manage how much you draw to ensure that your investments can sustain the income you need to draw for the rest of your life. There is a very real risk that you may reach the maximum drawdown rate and your income will decline in real (after-inflation) terms. Read more: What are the risks when drawing retirement income from investments?

You no longer legally own the capital and you cannot withdraw it all unless the amount falls below what is known as the de minis amount. This amount was increased from R125 000 to R150 000 from March 2026.

How can I invest in a living annuity?

There are no restrictions on how you can invest your savings in a living annuity.

Your choice of investments is, however, typically limited to the choice offered by the investment platform on which you access the product.

Unlike a retirement fund, there are no restrictions on how much you can invest in equities and listed property and no limits on how much you can invest offshore, but you may be subject to the insurer’s product rules.

As you will be drawing an income from the annuity, however, it is wise not to expose yourself to too much investment risk. Ideally, you need to balance your need to grow your capital for what could be a long time in retirement against your need to protect your capital against market losses – even temporary ones. Drawing an income continuously against capital during a market downturn can put its ability to recover, and your ability to draw the income you need, at risk. Read more: What are the risks when drawing retirement income from investments?

Can I transfer a living annuity to another provider?

The capital amount in a living annuity can be transferred to a living annuity with another provider.

If you transfer to a new provider, you have to keep the frequency of the payment – so if you are being paid monthly it must continue to be paid monthly. The annuity must be transferred as one annuity and cannot be split so that more than one annuity is payable after the transfer.

You may also use the capital amount to purchase a guaranteed annuity at any time. You should be aware that once you have purchased a guaranteed annuity you cannot convert it back to a living annuity.

How much tax will I pay on a living annuity?

The capital and income from a living annuity are taxed differently.

Capital

While the capital remains invested in the living annuity, it can grow free of:

• Income tax;
• Dividends tax, and
• Capital gains tax.
  
  

Pension or income

The income you withdraw is subject to income tax which depends on your marginal tax rate. Remember when you are over the age of 65, you enjoy a higher tax threshold, and an even higher one applies at age 75.

Living annuities are excluded from your estate and are therefore not subject to estate duty.

What happens when I die?

If you invest in a living annuity with money transferred out of your retirement fund, you can nominate one or more beneficiaries to receive the remaining capital in your living annuity after your death.

Your beneficiaries can choose to take the remaining capital, or part of it, as a lump sum or to continue to receive the income.

Lump sums paid after your death are taxed as if they were paid to you as a retirement fund lump sum the day before your death. The sum is taxed using the retirement fund lump sum tax table, which means any remaining portion of your lifetime tax-free sum of R550 000 can be used, whereafter tax is on a sliding scale depending on the lump sum paid out and previous lump sums taken.

If the beneficiary elects to receive the income, they will pay tax at their income tax rate and no tax will be paid on the capital.

If you do not nominate a beneficiary, the remaining amount in your annuity will be paid as a lump sum into your deceased estate after tax at the retirement fund lump sum tax table rate has been deducted.

If your annuity is an in-fund annuity provided by your retirement fund, the trustees of the fund will decide how to distribute the remaining capital, in line with section 37C of the Pension Funds Act and guided by any beneficiary nomination form you have completed.

What are the costs of a living annuity?

The costs of a living annuity provided by an investment platform can include:

The administration fee for using the investment platform;

The costs of the unit trusts or other investments you choose – the total expense ratio and investment charges;

An administration or policy fee for the living annuity; and

Any fee you agree to pay a financial adviser if you make use of one.