Think twice before setting up a trust
7th Dec 2018
Procedure for winding up a deceased estate
7th Dec 2018
Simply put, a Living Annuity is where your income is generated from when you retire. You can retire at any stage from age 55 onwards.
When you have the option to retire from your Pension, Provident, Preservation Fund or Retirement Annuity, you can invest the amount that you cannot access in cash (two thirds or whole amount) into a Living Annuity (or a Life Annuity).
The rules of the Pension, Retirement Annuity or Preservation funds regulate that you can take up to one third of the funds in cash, but the other two thirds must be invested into a Living Annuity or Life Annuity that will provide you with a monthly retirement income.
HOW IS THE TAX DETERMINED ON MY INITIAL CASH AMOUNT (UP TO 1/3) OF THE RETIREMENT FUND VALUE?
| Up to R 500 000 | 0% tax free |
| R 500 001 to R 700 000 | 18% tax |
| R 700 001 to R 1 050 000 | 27% tax |
| R 1 050 001 and above | 36% tax |
HOW WILL MY INCOME BE DETERMINED AT RETIREMENT?
You can withdraw between 2.5% and 17.5% of the funds in your Living Annuity per annum. The withdrawal rate will be determined by the following:
- How much is the fund worth?
- How much income do I need?
- What will the expected growth rate be over the next 12 months?
- What does my future income stream look?
- What is my intention with all my funds when I retire?
- Can my income percentage can be changed every year on the anniversary date?
- What is my life expectancy?
WHAT HAPPENS TO MY LIVING ANNUITY WHEN I DIE?
When you die, your beneficiary(s) have the choice of withdrawing the full investment balance (less tax) or continuing to take an income as you did.
WHAT TAX IS PAID ON MY LIVING ANNUITY INCOME?
This income forms part of your total taxable income and you will pay tax according to SARS determined rate.
WHAT IS THE BENEFIT OF RECEIVING AN INCOME FROM A LIVING ANNUITY?
Living Annuities fall outside your estate for estate duty and executors fees.
You can determine your income from your investment growth each year.
You can leave a legacy for your beneficiary as your income does not cease when you die.
WHAT RISKS ARE INVOLVED WITH A LIVING ANNUITY?
- Below average investment returns on your funds will erode your capital (after income/costs).
- The decision on which funds to use is important and this choice must be determined by your investment strategy (age/risk profile/total investments/income need, etc ).
- Drawing too much income could have a negative effect on your capital.
- There are no guarantees as far as income or capital growth is concerned.
AN EXAMPLE OF HOW A PENSION FUND CAN PAY OUT (CASH AND LIVING ANNUITY) :
Total Funds at retirement are R2 000 000.
- Elect to take R500 000 in cash (therefore tax free as per our table).
- The balance, R1 500 000 if the monthly income needed is R7 500. This will then work out to a 6% draw against the fund (R1 500 000 X 6% = R90 000 / 12 = R7 500). This amount is fully taxable.
Capital: Let us assume that the investment of R1 500 000 in the 3 different Unit Trust funds has a combined growth of 15% for the year. The end result after one year would be approximately the following :
| Capital | Year 1 |
|---|---|
| Plus 15% growth | R1 500 000 |
| Less income (R7 500pm) | R225 000 |
| Less costs 2% | R90 000 |
| Total after 1 year | R1 605 000 |
Therefore at the start of Year 2, our capital is now worth R1 605 000 and if we keep the income at a 6% draw again, the monthly income generated will now be R8 025pm.
(R1 605 000 X 6% = R96 300 / 12 = R8 025).
