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What is a living annuity?

19 Oct 2022

What is a living annuity in South Africa? A living annuity is a long-term financial product that offers regular payments.

There are two types of annuities: a guaranteed annuity, or living annuity.

Whether you’re in a pension fund, pension preservation, or RA fund, you need to use at least two-thirds of your fund’s value to purchase an annuity once it exceeds R247 500.

You cannot purchase a term life policy that only pays out for a specific number of years.

In a nutshell, Living Annuity (LA) is an investment product. It carries over the risk and responsibility of obtaining an adequate continuous income onto your shoulders. This way, you have better investment and income flexibility and your relatives inherit whatever capital you leave behind after death.

Living Annuities are investments that allow you to decide how to invest your savings within the investment options offered by your product provider. Unless you have the required investment knowledge, you should consult with reputable retirement planning service or financial advisor on the correct asset allocation and draw-down rate.

Living Annuities are primarily sold through LISPs, which stands for linked-investment service providers. Lisps are basically administrators that invest your funds in alignment with your instructions. They can then monitor the financial performance of your investments. However, Lisps don’t offer financial advice and have to correspond with them through a registered financial adviser.

A living annuity can accept proceeds only from a retirement fund or from another living annuity. You can add the proceeds from a retirement fund to your existing living annuity. You can also transfer your living annuity from a certain service provider to another but you can’t merge two living annuities into one.  

You must withdraw a pension from your investment every year. This is called draw-down and must be between 2.5% and 17.5% of the yearly value of the residual capital on the policy anniversary date. Your draw-down rate fluctuates from year-to-year, so make your election prior to the policy anniversary date. You can decide to receive your income every month, quarter, semi-annually, or annually.

We hope that this article gave you a clear understanding of how living annuity works in South Africa.