Living Annuities And Estate Planning

A living annuity is a retirement savings investment product that allows you to receive a regular income after retirement while keeping your remaining capital invested across various assets. One of the main benefits of a living annuity is the flexibility – enabling retirees to adjust their income withdrawals according to their needs and potentially enjoy investment growth, while preserving their initial capital. This flexibility differs from a life (or guaranteed) annuity, which offers a fixed income for life but doesn’t allow changes to withdrawals or investment options.

In this article, we will discuss how living annuities can be incorporated into your estate planning strategy. By strategically managing your living annuity within your estate plan, you can maintain a reliable income stream for yourself while ensuring that your remaining assets are effectively transferred to your beneficiaries.

A Brief Overview of Living Annuities

People can spend decades investing in retirement annuities (RA), allocating a portion of their income into various underlying assets every month, so that one day they can retire comfortably. But what happens when retirement finally comes around and it’s time to stop working? This is where living annuities come into play.

At the age of 55 or at any point after that when you retire, you can choose to move your RA savings into either a living annuity or a life (guaranteed) annuity. A living annuity is a post-retirement investment option that allows you to continue growing your retirement savings. With this option, you invest your savings based on your investment goals and risk tolerance, and you can then draw a retirement income at a percentage of your choosing (mandated by section 28 of the Pension Funds act to be between 2.5% and 17.5%). Unlike a life (guaranteed) annuity, which provides a fixed income, a living annuity gives you the flexibility to choose your investments, as well as adjust your drawdown rate and withdrawal amounts.

If you decide to go with a living annuity, the process works like this: After assessing your time horizon, risk tolerance, and financial objectives, you would select an underlying fund from those offered by your chosen provider. A living annuity allows you to customise your investment portfolio according to your preferences, spreading your investments across various asset classes, such as property, equities, or even offshore investments, depending on your needs.

For example, if you have a higher risk tolerance, you might lean towards a portfolio with a stronger focus on equities. If you prefer a more conservative approach, bonds could be a better match. With 10X, you also have the option to invest 100% offshore to reduce risk if most of your other assets are in Rands. All these options are available with a living annuity. Your capital would remain invested across different assets, and the returns generated would provide you with regular income throughout your retirement. If you want to see how a living annuity might work for you, you can do your sums with our handy living annuity calculator. 

As mentioned, with a living annuity, you can adjust the amount you withdraw annually (within regulatory limits), allowing you to tailor your income to your needs while keeping the rest of your capital invested. If your financial needs rise in one year, you can increase your withdrawal rate to access more income, and if your needs decrease the next year, you can reduce the rate accordingly. You also have the option to change your drawdown rate each year and decide how frequently you receive payments – whether monthly, quarterly, semi-annually, or annually. 

Note: To avoid depleting your savings, your income withdrawals, combined with the inflation rate and fees, should not exceed your investment returns. This principle is referred to as the "golden equation" and you can learn more about it here.

However, the significance of living annuities extends beyond retirement income; they play a vital role in estate planning, ensuring that your hard-earned wealth is passed on to your loved ones in a tax-efficient and orderly manner. Estate planning involves arranging and organising the management and disposal of your assets in preparation for your passing – and integrating living annuities into your estate plan can be a strategic move to preserve your wealth, minimise taxes, and provide for your beneficiaries after you pass.

10X Living Annuities

The 10X Living Annuity is a standout option in the market, offering retirees the potential to grow their retirement savings through smart investment strategies. 10X Investments employs a methodology that emphasises diversification, asset allocation, and low fees – all of which are critical to securing a comfortable retirement. 

The underlying funds in a 10X Living Annuity are designed to provide broad exposure to various asset classes like equities, bonds, and property, thereby reducing risk and enhancing returns over the long term. A great example is the 10X Your Future Fund, one of our flagship funds, designed to outperform the market through a diversified portfolio that adapts to changing market conditions.

Another key feature of the 10X approach is the focus on low fees. High fees can erode retirement savings significantly over time, so our commitment to keeping costs low is a major advantage for retirees. There are significant cost-savings the lower your fees are, so a living annuity with 10X directly equates to enhanced capital growth. Take a look at our free cost comparison tool and see how much you could be saving with 10X Investments. 

Estate Planning And Where Living Annuities Fit In

Estate planning is the process of organising and managing your assets during your life and arranging for their distribution after your death. It’s a crucial aspect of financial planning that ensures your assets are transferred to your beneficiaries in a smooth, tax-efficient manner. Without an effective estate plan, your assets could face extended probate procedures, potential legal conflicts, and avoidable taxes – all of which could significantly reduce the inheritance left to your loved ones. 

The proceeds from a living annuity are not subject to estate duty upon your death, making it an efficient tool for estate planning. As long as there is capital remaining in your living annuity, it can continue to provide financial benefits to future generations. For example, if your spouse inherits your living annuity after your passing, they can continue to draw an income from it, and any leftover capital after their death can be passed on to the next nominated beneficiary. This ability to pass on residual funds is a valuable aspect of living annuities, especially for those who have accumulated significant savings over their careers. 

Estate Liquidity

Estate liquidity is crucial to ensure that your estate can cover its financial obligations without reducing the inheritance meant for your loved ones. When calculating liquidity, it's important to consider potential taxes, capital gains, estate duties, and any outstanding debts. Remember that during estate administration, SARS and creditors must be paid first. Only after these payments will the remaining assets be distributed to your heirs. 

Living annuities in South Africa offer some level of protection from creditors, but this protection has limitations. The capital in your living annuity is safeguarded from creditors and can’t be seized through a court order (the lump sum amount within the annuity remains secure). However, the income you withdraw from the annuity doesn’t have the same level of protection. 

Once you withdraw funds as income, that money becomes part of your estate and can be subject to claims by creditors. Therefore, while your annuity capital is safe, any income derived from it could potentially be at risk if you face financial liabilities​.

If your estate doesn’t have enough funds to cover its debts, the executor may need to sell assets like your home, vehicles, or other valuable items, which could negatively impact the financial security of your family. In the case of living annuities, since the money in your living annuity belongs to you, you can choose who will receive it when you die by naming beneficiaries – and if you need to create cash flow for your estate, you can name the estate as the beneficiary.

Beneficiary Nomination 

Integrating living annuities into your estate plan demands strategic planning, and one of the primary steps in this process is designating beneficiaries for your living annuity. Beneficiary designations are of utmost importance because they determine who will receive the remaining balance of your annuity upon your death. Moreover, naming beneficiaries isn’t a one-time task, but rather something that should be regularly updated as your life goes on, especially in the case of major life events like marriage, divorce, or the birth of a child.

A significant distinction between living annuities and life (guaranteed) annuities from an estate-planning perspective is how the remaining capital is handled after your passing. A life (guaranteed) annuity becomes the property of the insurer after your passing, leaving nothing for your heirs (unless you have paid more and therefore drawn less income in return for such a benefit). 

In contrast, a living annuity allows you to leave any remaining capital to your chosen beneficiaries. These nominated beneficiaries typically have several options for receiving the funds. They can choose to continue receiving the annuity payments, take a lump sum payment, or take part of the money as a cash payment and use the rest to buy an annuity of their own.

Estate Administration

Good estate planning helps speed up the process of settling your estate and avoids unnecessary delays. Basic steps like making sure your will is valid, informing someone where the original will is kept, choosing a capable executor, and maintaining an estate planning file can make the administration of your estate much smoother. 

Legal considerations are also a key part of integrating living annuities into your estate plan. Proper documentation, including beneficiary designations and a well-drafted will, is essential to ensure that your wishes for your living annuity are carried out after your passing. If you don't name any beneficiaries, the remaining funds will become part of your estate and be subject to estate duties. These funds will then be distributed according to your will or, if you don’t have a valid will, according to the laws of intestate succession.

Tax Liabilities 

Effective estate planning also allows you to minimise taxes when you pass. Estate duty, which is a tax on transferring assets from the deceased’s estate to beneficiaries, is 20% on estates up to R30 million and 25% on anything above that. The taxable value of your estate is calculated by adding the value of your property, subtracting allowable expenses, and applying the Section 4A rebate (a tax relief provided to individual taxpayers, reducing their tax liability by a fixed amount – currently R3.5 million. Simply put, the first R3.5m within the estate is tax-exempt). However, there are several ways to reduce estate duty and maximise your loved ones’ inheritance. 

Retirement funds like pension, provident, preservation funds, and retirement annuities aren’t included in your estate and are exempt from estate duty. Likewise, living annuities also avoid estate duty if you’ve named beneficiaries. Moreover, one of the primary tax benefits of living annuities is that the income drawn from the annuity is taxed according to your personal income tax rate. 

This can be a major advantage if your chosen beneficiary is in a lower tax bracket than you are. For example, if you pass away and your spouse, who is in a lower tax bracket, becomes the recipient of the annuity income, the tax liability on that income may be reduced, preserving more of the funds for their use. Alternatively, if your chosen beneficiary chooses to take the residual value in cash, it’s important to note that only R550 000 of it can be withdrawn tax-free. SARS’ retirement fund lump sum tax tables can be found here.

If no beneficiaries are nominated or your beneficiaries cannot be traced, the residual value of your living annuity investment will fall within your deceased estate and be subject to estate taxes. These estate taxes can be as high as 36% depending on past withdrawals and commutations. The residual value will also be subject to deductions to pay the executor of the estate, which can be as high as 3.5% plus VAT.