Warning for retirees in South Africa

South African retirees should avoid drawing too much from their living annuity in retirement.

10X Investment Consultant Brett Mackay said that instead of cashing out all retirement savings in a lump sum, living annuities protect individuals by allowing them to draw a monthly income.

This protects one’s capital while ensuring that the bulk of the money can keep growing over the long term.

In some cases, it is possible to cash out one’s entire retirement savings that they have saved throughout their career, with the intention of using this fund for the rest of their lives.

That said, being able to cash out the bulk of your retirement investments at 65 creates a false sense of security as the value is seen as incredibly high, making it tempting to spend too much of the cash too quickly.

It is crucial to remember that people are living longer these days, meaning that money has to stretch longer.

Living annuity pros

“One way to get the most out of your investments and sweat this asset is to draw down what can be viewed as a monthly salary, leaving your capital to continue growing,” said Mackay.

“This is a living annuity into which your retirement savings are paid. It also means that the bulk of your money gains at a tax-free rate, although what you cash out monthly will be taxed as if it were a monthly income.”

The Association for Savings and Investment South Africa (Asisa) said that South African retirees had R625.9 billion of their retirement savings invested in living annuities at the end of 2022 – a 47.3% from 2018.

Living annuities offer the choice of pulling out between 2.5% and 17.5% of a fund’s value each year, with the option of an upfront payment, quarterly, bi-annually or monthly payment.

That said, careful planning is required to ensure that the lump sum lasts as long as possible.

If one pulls out the maximum of 17.5% each year, the value of their capital will be eroded.

“Living annuities are not considered part of the deceased estate as long as there are nominated beneficiaries – which allows the investment to go directly to loved ones named as heirs,” said Mackay.

“Your heirs have the option of taking the living annuity investment out as a lump sum or continuing to draw down monthly, but they need to bear tax implications in mind.”

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