LIVING ANNUITY

A Living Annuity puts you in control of the income - and the risk that goes with it.

A Living Annuity converts retirement capital into a monthly income that you control, within limits set by legislation. That flexibility is its main appeal and its main risk: the income is not guaranteed for life, and a drawdown rate that is too high can outlast the capital that supports it.

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Overview

Size the drawdown to the capital, not the capital to the drawdown.

We look at the capital available, a realistic investment return assumption, and the income actually needed, so the drawdown rate chosen is sustainable over a retirement that could last several decades - rather than working backwards from a desired monthly income without testing whether the capital can support it.

What a Living Annuity is, and how it differs from a guaranteed annuity

A Living Annuity is a post-retirement investment product into which retirement capital - typically at least two-thirds of a Retirement Annuity, pension or provident fund benefit - is transferred at retirement. The capital remains invested, and the retiree draws a regular income from it, while choosing (or being advised on) the underlying investment portfolio.

This is fundamentally different from a guaranteed (life) annuity, where the capital is handed over to an insurer in exchange for a fixed income promised for life, regardless of how long the retiree lives or how markets perform. A Living Annuity keeps the investment risk, the longevity risk and the underlying capital with the retiree - along with the flexibility to adjust income and investment choice, and the ability to leave any remaining capital to beneficiaries on death.

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The legislated drawdown limits

A Living Annuity's annual income must be set as a percentage of the remaining capital, reviewed and re-elected once a year, within limits set by regulation: a minimum of 2.5% and a maximum of 17.5% per year. These limits exist precisely because an income drawn without any ceiling could deplete the capital far faster than the retiree intends.

The percentage is applied to the capital value at each anniversary, not to the original starting capital, so the Rand amount of income changes as the underlying investment value changes. A retiree who draws at the upper end of the range in a period of poor investment returns can see both their capital and their future income fall together - a risk that is easy to underestimate when the account is still large.

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Sustainability: the risk that sits with the retiree

Because the income is not guaranteed, the central risk of a Living Annuity is sequence-of-returns risk: poor investment performance in the early years of retirement, combined with ongoing withdrawals, can permanently impair the capital's ability to recover - even if long-term average returns are reasonable. A drawdown rate that looks sustainable on an average-return assumption can still fail if poor returns arrive early.

This is why the investment portfolio underlying a Living Annuity, the drawdown rate selected, and the retiree's other sources of income (such as a guaranteed annuity, a state grant or other savings) need to be considered together, rather than the drawdown percentage being chosen in isolation to meet a target monthly income.

Tax treatment of the income

Income drawn from a Living Annuity is taxed as ordinary income at the retiree's marginal tax rate via PAYE, in the same way as a salary or a guaranteed annuity payment - there is no separate, more favourable tax table for Living Annuity income. The capital itself is not taxed again on withdrawal, since it has already passed through the retirement fund tax rules (or, for the lump sum portion taken at retirement, the retirement lump sum tax tables) before the annuity was purchased.

On the death of the retiree, remaining capital is dealt with under the annuity policy and the applicable retirement-fund rules rather than simply as an ordinary estate asset. Beneficiary choices and tax treatment can differ by policy, fund rules and circumstances, so the nomination and current product terms should be checked rather than assumed.

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Read our Retirement Annuity guide
Key considerations

What to weigh up before you commit.

Drawdown rate

The annual income percentage must sit between 2.5% and 17.5% of the remaining capital, re-elected every year, and materially affects how long the capital lasts.

Investment choice

The underlying portfolio continues to carry market risk after retirement, and needs to be matched to the drawdown rate and the retiree's time horizon.

Sequence-of-returns risk

Poor investment returns early in retirement, combined with ongoing withdrawals, can permanently impair the capital even where long-term average returns are adequate.

Income tax

Living Annuity income is taxed as ordinary income at your marginal rate through PAYE - there is no separate, lower tax table for this income.

Guaranteed annuity comparison

A guaranteed annuity trades flexibility and legacy value for a fixed income for life, which is worth comparing against a Living Annuity's flexibility and market exposure.

Beneficiary nomination

The product terms and retirement-fund rules govern how remaining capital is dealt with on death, so the beneficiary nomination on file and the current terms should be kept under review.

Questions

Living Annuity questions, answered clearly.

What is a Living Annuity?

A Living Annuity is a post-retirement investment product that holds the retirement capital transferred at retirement, remains invested, and pays the retiree a regular income drawn from that capital, within legislated limits, rather than handing the capital to an insurer for a fixed income.

What are the drawdown limits on a Living Annuity?

The annual income must be set as a percentage of the remaining capital, reviewed once a year, between a minimum of 2.5% and a maximum of 17.5%. The percentage is applied to the capital value at each review date, so the income amount changes as the underlying investment value changes.

How is Living Annuity income taxed?

Income drawn from a Living Annuity is taxed as ordinary income at your marginal tax rate through PAYE, in the same way as a salary. There is no separate, more favourable tax table for this income.

What is the difference between a Living Annuity and a guaranteed annuity?

A guaranteed annuity pays a fixed income for life in exchange for the capital, with the insurer bearing the investment and longevity risk. A Living Annuity keeps the capital invested and the income flexible, but the retiree bears the investment risk, the drawdown risk and the risk of the capital running out.

What happens to my Living Annuity capital when I die?

The annuity policy, the retirement-fund rules and the beneficiary nomination govern the treatment of remaining capital. Beneficiaries may have choices over how benefits are received, but the available options and tax treatment should be confirmed from the current product terms and applicable rules.

Can my Living Annuity capital run out?

Yes. Because the income is not guaranteed, a drawdown rate that is too high relative to investment returns - particularly poor returns early in retirement - can deplete the capital faster than expected, which is why the drawdown rate and investment strategy need to be reviewed regularly, not set once and left unchanged.