Information about living annuities
What is a living annuity? | How do I invest in a living annuity? | What are the advantages of investing in living annuities? | What are the disadvantages of investing in a living annuity? | What are the costs of a living annuity? | Where do I deposit funds? | Other questions | Where can I find more information about living annuity funds?
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A living annuity is a post-retirement product designed to provide investors with an income after retirement.
The rules of pension funds, pension preservation funds, retirement annuity funds require that on retirement, a maximum of one third of the value of the assets of these funds may be taken in cash and the remaining two thirds of the assets should be invested in a living annuity fund. However some clients retiring from retirement funds opt to invest the full amount in a living annuity, while others opt to reinvest the ‘cash’ portion into a dividend producing unit trust fund of their choice.
Current legislation stipulates that living annuities must be purchased from registered long term insurers. In the case of PSG Online, the registered insurer is PSG Asset Management Administration Services Limited.
Current legislation does not require that investments in living annuities should be invested according to Regulation 28 of the Pension Funds Act. However, most administrators suggest that the prudential guidelines adopted in investing pre-retirement assets should be adopted when investing in living annuities.
Living annuities allow for a withdrawal rate of not less than 2.5% and not greater than 17.5% of the value of the assets. It is logical that living annuity members should select a withdrawal rate which is appropriate from a risk and return perspective to ensure that the living annuity provides sufficient income and capital growth to provide for the lifetime of the member. It is advisable that a financial advisor assist you in this process. To speak to a financial advisor please click here
In practice, you can select either a Rand amount or a percentage of the value of your investment as an annuity. You may also stipulate the frequency of the payment to be made to you, which could be monthly, quarterly, half yearly or annually.
Unlike traditional annuities, the capital invested in a living annuity fund does not die with the client and remaining capital can be bequeathed to heirs. A living annuity investment may not be ceded to another investor, nor may it be offered as security for a loan.
In terms of current legislation, the investment returns (capital growth, interest and dividends) of living annuities are not taxed. However, the member of the living annuity fund is liable for income tax on income received, taxable at the marginal rate.
If you are interested in investing in living annuities via the PSG Online investment platform you should complete the simple online registration process.
- STEP ONE: Register online for living annuity account and PSG Online web profile.
- STEP TWO: Provide us with your FICA details if you are new to PSG Online. PSG Online will open your unit trust account within 72 hours of receipt of your FICA documents.
- STEP THREE: Login to your collective investment scheme account. You will use the same username and password chosen when you registered for your web profile in Step One.
- STEP FOUR: Choose a unit trust fund (or funds) from our list of funds which are managed according to the Pension Funds Act.
- STEP FIVE: Complete the documents for transferring your funds from your pension/provident or retirement annuity fund to your living annuity fund. Click here to download these documents.
A living annuity fund is tax effective as the fund itself (the capital growth of assets in the fund as well as interest and dividends paid within the fund) is not subject to tax. The Dividend Withholding Tax does not apply to living annuities. However, the member of the living annuity fund is liable for income tax on the payments made by the fund, taxable at the marginal rate.
On the death of the member of the living annuity fund, the value of the capital is not lost to the estate (as was the case with traditional annuities).
Advantages of living annuities with PSG Online
One of the key advantages of living annuities from PSG Online is that you have the option to manage your investment yourself. You may select either prudential funds (those managed according to the Pension Fund regulations) or more aggressively managed equity funds as the underlying holdings of your living annuity.
Please click here to view a complete list of our funds and fees.
The underlying holdings of a living annuity through PSG Online are fully transparent. The market value of the underlying unit trusts selected by you is available on a daily basis.
All costs and fees of the investment are fully disclosed.
The main disadvantages of a living annuity are that there are no guarantees with respect to the performance of the underlying holdings and no income guarantee. Investors in living annuities take the full risk associated with market volatility or underperformance. The capital value of a living annuity can therefore be eroded during times of poor market performance.
The capital value of the living annuity can also be eroded by high levels of income withdrawn from the living annuity. It is the responsibility of the member of the living annuity fund to manage this process.
Risks associated with living annuities
Investors in living annuity funds who plan to live off the capital of their investment should attempt as far as possible to limit draw downs as much as possible, allowing the capital value of the investment to grow.
The capital value of the fund will erode if the annuity paid out exceeds the growth of the underlying investments.
You should speak to a financial advisor about the most appropriate draw downs, given your age, capital sum and living expenses. To speak to a PSG Konsult advisor please click here
- Platform fees, fund manager fees and other costs are dependent on the choice of underlying holdings.
For living annuity accounts please make deposits to the following bank account with your portfolio number as a reference:
|Bank||Standard Bank of S.A. Ltd|
|Account name||PSGAML Compulsory Deposit Account|
|Deposit reference number||Your unit trust portfolio reference number or ID number|
For a full list of PSG Online banking details click here.
Q: Are there any investment restrictions imposed on living annuity funds?
A: Current legislation does not include any restrictions on the underlying holdings of living annuity funds. However, proposed legislation currently in draft form proposes that living annuity funds should be managed in accordance with Regulation 28 of the Pension Funds Act.
Q: When can I change the annuity (Rand amount or percentage) or the timing of the frequency of my annuity?
A: Annually, on the anniversary of your investment.
Q: When does a living annuity come to an end?
A: Your living annuity investment will come to an end if the capital savings are depleted, at your death, or should you transfer the investment to another long term insurer. If the value of the investment falls below R50 000, you may request that the balance of the investment is paid to you.
Q: Who receives a living annuity upon the death of the annuitant?
A: The annuitant's nominated beneficiaries, regardless of whether or not there are other dependants, may receive the proceeds at your death.
Q: What are the options open to the beneficiary of a living annuity?
A: When a living annuity policy holder dies, the nominated beneficiaries of the deceased have three options (regardless of the source fund):
- They are entitled to take the full benefit in cash, or
- They may transfer the full benefit to a pension providing vehicle such as a living annuity, or
- They can take a portion of the benefit in cash and transfer the remainder into a pension providing vehicle.
Q: What are the tax implications for the beneficiary of a living annuity?
A: The lump sum amount that the beneficiary elects to receive will be taxed in the hands of the deceased and not in the hands of the beneficiary as if taken by the deceased on his/her retirement.
Any tax free allowance not previously used by deceased may be taken into account when SARS calculates the tax payable on the death benefit.
The same applies to future beneficiaries. When the next annuitant dies and his beneficiary commutes a portion of the living annuity, such commutation will be seen as a lump sum withdrawal upon the retirement of the latest deceased annuitant.
Q: What happens to the living annuity Fund if I want to emigrate?
A: Legislation prohibits a living annuity which originated in South Africa from being transferred to another financial services provider abroad. For this reason, if you emigrate you have to leave your living annuity with a service provider in South Africa. Transfers to another South African financial services provider are however allowed.
Service providers are obliged to pay an income to the client from the living annuity. PSG Online will pay the income in Rand, so if you emigrate you have to keep a South African-based bank account open. The income is paid into the blocked account from which the funds are transferred to your foreign bank account.
The authorised bank that places your emigration on record is required to submit an exchange control application to the Reserve Bank, requesting permission for the income from the living annuity to be remitted abroad.
You can find more information about living annuities schemes on our unit trust FAQ page.